Energy Crisis

History On Vacation

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on July 24, 2016

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What experience and history teach is this — that people and governments never have learned anything from history, or acted on principles deduced from it …

— Hegel

We solved Hegel’s pesky problem in 1998 when Francis Fukuyama posited the prospect of universal liberal democracy, along with it, the end of history:

What we may be witnessing in not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.




This is not to say that there will no longer be events to fill the pages of Foreign Affairs yearly summaries of international relations, for the victory of liberalism has occurred primarily in the realm of ideas or consciousness and is as yet incomplete in the real or material world. But there are powerful reasons for believing that it is the ideal that will govern the material world in the long run …



… because that is the futurist narrative in its entirety: to consign whatever it deems obsolete/old/unfashionable including history itself, to the dustbin of history!

By 1998, the narrative made some sort of sense: the outré Soviet Union had crumbled under its own weight even as the Chinese export ‘miracle’ was gathering force; in Europe the ground was being prepared for the euro. The West had triumphed over what it had painted as socialist tyranny — the absence of consumer choices. Gone were the, gloomy, paranoid Stalinist dictators in Russia and across Eastern Europe, swept aside by cheap color televisions and counterfeit Levis, menthol cigarettes and Ronald Reagan. The nuclear boogeyman had been seemingly stuffed back into a bottle then redeemed for a 10¢ ‘peace dividend’. Oil prices were low and American confidence in endless Ponzi wealth was high. Technologies were appearing out of what seemed to be nowhere offering solutions to problems we did not know existed: robots (to replace workers), Internet (to replace more workers) and genetic engineering (to replace the remaining workers). Certainly all of the above would bury history forever … right?

The West was to become a Keynesian paradise of endless abundance and leisure, a suburbanite fairyland of Negro-free gated ‘communities’, of pastel McMansions and luxury SUVs; of gourmet meals crafted from GMO ingredients washed down with magnums of Veuve Clicquot and narcissism. We would play croquet as eternal children under the glorious sunshine of prosperity while ‘disutility’ (labor) would be performed ‘somewhere else’ (Mexico). The waste and destruction associated with industrialization would vanish because we would all be rich enough to hire robots to clean up after us.

There were a few clouds: the tail-end of trivial conflicts in Central America; the ‘War on Drugs’, the Asian finance crisis in 1997 and the collapse of the Russian economy the following year. Long Term Capital Management followed the Russian economy into the toilet in early 1998 necessitating the first ‘rescue us or else’ mega-bailout of Wall Street. These events were diversionary theater: people who could afford it lost some money, bosses who badly needed new jobs lost theirs. All in all the entire reconfiguration process turned out to be remarkably painless.

Looking back, the notion of final geopolitical resolution was naively optimistic, a quaint artifact of a particular zeitgeist, like Beatle Boots or flip cellphones. What was really happening was the ending of the ending: ancient monsters were not vanquished only hibernating so as to take new forms. Now, when we need it most and want it least, history has stormed out of its coffin like a vengeful, blood-hungry vampire, reminding us all why we wanted to be rid of it in the first place.

Enter the new millennium and (quasi-)liberal democracy and finance capitalism are being shellacked and nobody can figure out why. Extreme events are tripping over each other like – add your favorite cliché here – cheese and macaroni. Radicals are ascendant as the status quo proves unable to prevent the consumption utopia from slipping out of reach. Strategies that once bore fruit are revealed as nonsense; military ‘stimulus’, central bank witch doctoring, austerity, institutionalized discrimination, trivial interest rate- and foreign exchange manipulation. The outcome is credit transfers from those with less to those with everything … and fury. With chaos on one side, dithering on the other, the public turns toward autocrats while societies — particularly across the arc of northern- and central Africa to south Asia — blow apart at the seams, writhing in agony, frantic to escape the vice-like grip of ‘less’ and unmet expectations.

This is the terror that dares not speak its name; not to be engulfed by refugees or shot by militants but forced by desperate necessity to become one! Rage is fear by another name.

Events rise up like rogue waves, smash with shocking force … and then vanish. In the space of a month there is the #Brexit vote — against the backdrop of faltering credit — US police shootings, also people shot by police; terrorist truckers, airport attackers, car bombings in city markets, nightclub massacres and more nightclub massacres. There are the coups that aren’t and the rounding up the usual suspects … the droughts and floods, grinding wars, food shortages and millions of desperate refugees, all lingering on Twitter for an instant then … gone. Staring us in the face is the breakup of the Eurozone and the end of the euro, currency- and economic failure in Venezuela and Brazil, environmental degradation and habitat collapse, the deflation of property/asset bubbles worldwide … unraveling is no longer a matter of ‘if’ but ‘how bad’.

Mazama-Turkey 071816

Figure 1: … the status quo proves unable … Mazama Science (click on for big). Turkey has almost nothing in the way of domestic oil resources yet it burns through three-quarters of a million barrels per day, paid for with borrowed euros and dollars. Turkey earns some hard currency from tourists as well as a modest margin from pipeline fees. These last are far from enough: without loans the economy collapses in a hurry, with loans the collapse takes a little longer. The Turks could save themselves by way of stringent conservation but choose instead to wager the rent on a New Ottoman Caliph, betting that utopia can be rationed away from domestic enemies or stolen from its (even more bankrupt) neighbors.


Figure 2: Turkish lira relative to the US dollar, chart by XE (click for big). Depreciation of lira is the means by which Turks are forced to conserve against their will. With the passage of time, more liras are needed to obtain the dollars and euros needed to pay for imports. Economic theory suggests that currency ‘values’ run in cycles and that the lira will eventually regain its footing. History suggests the lira is a disposable relic and that markets have not yet ‘caught down’ with reality. Turkey’s currency represents little other than empty gestures and voracious demand. When history was on vacation, symbols and demand were assets to be leveraged; in the new Age of Less these things are liabilities. As the Turkish inter-temporal balance sheet breaks down so does the currency.

Tyrants like Trump and Erdogan (and Clinton) are products of industrial resource capitalism no different from McMansions and automobiles, they are also fetishes. Unlike vicarious pleasure-pussy Taylor Swift, tyrants symbolize power, ruthlessness and control … and increasing surpluses. Their promise to harvest gains by whatever means is the substance of their public appeal. The relationship between tyrant and followers is symbiotic and self-reinforcing. Adherents give form and color to the tyrant’s outline while the tyrant suspends- or outruns institutional restraints, providing the necessary sanction for adherents to act out their own impulses, destructive or otherwise.

The emergence of tyrants like Trump and Erdogan (and Clintons) is suggestive: that technology cannot produce the consumer outcomes we are desperate to preserve. If technology could save us autocrats would not be necessary. They are reductive rather than creative, their first- and last resort is coercion as when governments dragoon pensioners rather than machines to rescue finance.

We are in the middle of a crisis that has been ongoing for over five years: the managers demand the economic system be bailed out. Of whom do they make demands? Entrepreneurs? Innovators? The finest minds of a generation?

A: Pensioners.

The economies must become more productive which means increasing the efficiency of output. Consequently, pensioners are called upon to sacrifice their retirements in the UK, Europe, in the US … in cities and states: pensions everywhere are under attack.

Why not more machines? If machines are productive, wouldn’t deploying more machines solve the economic problems around the world rather than deploying our grandparents? Technology is supposed to save us but the raiding of pensions insists otherwise: the scraping of the bottom of the barrel in real time. It’s an admission that technology doesn’t work, from the people who are in a position to know.

What happens after the retirements are pillaged? Who knows? Nobody has a plan.

The world’s Trumps and Erdogans (and Hitlers) are First Law change agents and as such are integral/inevitable components of national- or supranational surplus aggregation … one of the costs of our ‘success’. History shows us that empires at the point of decline choose rotten emperors and incompetent caliphs. This is analogous to Hyman Minsky’s ‘Financial Instability Hypothesis’ that suggests periods of investment success are by themselves destabilizing w/ speculative malinvestments leading to crashes. Socio-political ‘Minsky Moments’ are products of long periods of dominion by a particular clique or political enterprise which becomes fertile ground for corruption and self-dealing, also malinvestments in perverse reasoning.

Because industrialization has produced outsized surpluses, the rottenness of caliphs (cost) is increased in proportion. Tyrants’ failures are more destructive; so are the failures of well-intentioned elected caliphs. The First Law outcome is invariably surplus reduction, nothing can stop it; conventional policies only makes things worse. Resource depletion is both unpleasant and permanent, the only strategy is to carefully navigate decline; to surf the smashing waves rather than be swept away by them. Depletion cannot be defeated in battle or outmaneuvered, it cannot be negotiated away or paid off. Less can only be adjusted to: unwillingness to adjust leads to exhaustion and ruin. Sadly, no leader, not one … no economist, no central banker or financier proposes to voluntarily make do with less, to embrace the ancient virtues of restraint, patience and modesty; to corral our competitive greed and tread lightly upon our life-support system …

Appearance is higher than mere Being −− a richer category because it holds in combination the two elements of reflection−into−self and reflection−into−other: whereas Being (or immediacy) is still mere relationlessness, and apparently rests upon itself alone.




— Hegel



“It is only shallow people who do not judge by appearances. The true mystery of the world is the visible, not the invisible….”




— Oscar Wilde



In the twilight of modernity we have become intoxicated with the idea of power, to have our way at the expense of others who are powerless to do anything to stop us. The idea (appearance) has more potency than does the thing itself, as the exercise of power carries with it consequences.

American Exceptionalism boils down to a kind of property right; to own human and mechanical slaves, to stake claims against the entirety of nature; the plants and animals and water even the rocks under our feet … to possess whatever is in sight like a chair or pair of pants … and with the same degree of accountability/carelessness.

There is our pitiless assault on everything, living and non-living, without which there is no ‘our’. The frenzy is to burn the world before someone else beats us to it, to render and distill and catalyze everything into money. Our precious tycoons will burn that as well … we have gone insane.

The fetishes have us in their thrall: the rifle and machine gun, the tank and the airplane and the hydrogen bomb … also the strip mine, the excavator, the chain saw and the automobile. Also the lies on television.

If we possessed the wits we would be mortified, would beg forgiveness and search for wisdom … As inhabitants of Sodom and Gomorrah we are simply cursed to live out the consequences of our own madness.

Ciao, Britannia!

TriangleofDoomgc2reddit-logoOff the keyboard of Steve Ludlum

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Published on the Economic Undertow on June 8, 2016

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Triangle of Doom 062516

Figure 1: Chart by TFC Chartz (click for big): It’s called the Triangle of Doom for a reason, carried through to the end, no outcome is possible other than demise of the automobile industry and its petroleum dependencies. Since 2000, there have been a series of petroleum price surges intended to meet the industry’s exorbitant extraction costs. Each attempt has failed as credit conditions outside the fuel markets deteriorated. As can be seen, many of the credit failures originated within the European Union. These fails, credit shocks and price retrenchments are to some degree, a product of EU structural shortcomings. Now, the British have voted to leave the EU, panic ensues: (NY Times).

‘Brexit’ Sets Off a Cascade of Aftershocks …




Maybe the future does not include flying electric cars after all.

By Steven Erlanger





Britain’s startling decision to pull out of the European Union set off a cascade of aftershocks on Friday, costing Prime Minister David Cameron his job, plunging the financial markets into turmoil and leaving the country’s future in doubt. The decisive win by the “Leave” campaign exposed deep divides: young versus old, urban versus rural, Scotland versus England. The recriminations flew fast, not least at Mr. Cameron, who had made the decision to call the referendum on membership in the bloc to manage a rebellion in his own Conservative Party, only to have it destroy his government and tarnish his legacy.




So it goes. There is a huge reaction and certainly more to come as markets digest what has happened … and what is certain to come. In the end it is very simple …

The Brexit vote was inevitable. Britain had no choice but to jump in the lifeboat and abandon the sinking EU Ponzi scheme.

Will it succeed? Probably not but it has to try. If not England it would have been another big European country, perhaps Italy as the first to abandon the scheme. The rest have to wait … but not for long. England’s alternative would be to devolve in a few short years to a petty euro protectorate like Greece or Ukraine begging Russia for fuel and Frankfurt for loans and forbearance. At issue is UK’s massive (£6+ trillion) external balance sheet, its banking liabilities vs. the dubious quality of its assets.

Brexit states unequivocally the City of London is insolvent; at the the point where it cannot finance itself any longer. This is the reason why the establishment rolled out the Brexit referendum in the first place, to save the banks. Think of Brexit as a bailout: the small will pay for the excesses of the great. The City certainly cannot finance the rest of the country and its massive and non-remunerative fleet of gas-guzzling automobiles; something has to give. There are 31.5 million cars in a country of 64 million humans, each car requires the resources of 20 persons. UK staggers under the equivalent human population of 630 millions on a small island … the bulk of those being dented, metal deadbeats. Talk about immigration, no wonder the economy struggles.

The automobiles and their need for fuel imports and infrastructure paid for w/ endless credit issue have bankrupted the entire West, not just England. In Europe: the euro = gasoline. For once — maybe not realizing exactly why and not being entirely happy about it — the British have voted against their cars.

It’s about time!

It All Falls Apart

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Published on Economic Undertow on July 15, 2015

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Happy families are all alike; every unhappy family is unhappy in its own way.

— Leo Tolstoy, ‘Anna Karenina’

It is hard to keep up with events.

The current, non-Varoufakis Greek government has surrendered to German austerity demands. How this turns out is anyone’s guess … except for the big picture. At the beginning of the day, Greece and the rest of Europe were broke. At the end of the day, regardless of policy or direction, Europa and Greece will still be broke.

Fred GDP-debt 061515

Figure 1: US total credit market liabilities compared to US GDP, chart by @FRED. At the foundation of the crisis in Europe is a false narrative; that countries- or firms can retire their debts by way of labor. Those who do not do so are lazy or thieves. This US chart indicates that economic activity (GDP) by itself cannot retire the debts that are taken on to subsidize it. Maturing debts- plus accrued interest are rolled over into larger loans, debts are diluted over time — inflation — but never repaid.

Greece and the European Union are unhappy families right now but their misery is common. Greeks cannot repay … neither can the Spanish, Irish or Italians. Argentines cannot pay, neither can Puerto Ricans … or Chinese manufacturers. Energy companies whether in Canada, Australia, North Dakota or Brazil cannot pay, neither can citizens/governments/firms in Venezuela, Egypt, Ukraine, etc. All are broke, their pockets are turned out; unhappiness — along with total debt — expands exponentially.

The problem really isn’t so much a credit shortage but energy- and resource crisis coupled with political denial. Energy crisis does not take the form of physical shortages; there are no gas lines, coupon rationing or odd-even days. Instead, oil is depleted and credit breaks down at the margins … Since 1973, world governments have erected every sort of fuel price hedge, all of them make use of credit in some form or other to allocate fuel. What is underway the credit allocation taken to its logical conclusion, where for increasing numbers there is no more credit: ‘Conservation by Other MeansTM

The shortage of fuel => higher prices due to supply and demand => greater need for loans as the use of the fuel is non-remunerative => the combined cost of fuel + credit becomes breaking => insolvent customers can no longer borrow or repay => as credit unravels the fuel bid declines. Within this dynamic, the two larger themes are energy deflation and dollar preference:

– Energy deflation; which occurs when the real price of fuel — its price relative to other goods and services — remains unaffordable even as the nominal price declines.

– Currency preference; takes hold when one currency such as the dollar becomes a proxy for fuel rather than a proxy for commerce: both credit and foreign exchange are discounted against preferred currency, which is hoarded.

During energy deflation, fuel price declines become self-reinforcing: lower prices lead to shortages that adversely affect end users who are unable buy … this leads to even lower prices and more shortages in a vicious cycle. At the same time, the absence of solvent customers offers the appearance of a fuel supply glut. When one currency becomes dominant, fuel becomes scarce due to lack of investment. The price then falls to reflect actual return on use of fuel rather than false returns offered by way of credit — which vanishes. Because the actual return on fuel use is small- or negative, the ultimate fuel price is very low.

As with debt-deflation, the energy scarcity premium is levied against the economy as a whole, it can take any form including decreased employment or solvency, diminished reserve holdings and tax revenues, etc. Keep in mind, when fuel becomes unavailable due to its unaffordability it tends to remain so indefinitely. Fuel shortages do not make the oil users wealthier- or more credit worthy, the driller does not become wealthier by way of reduced output, either.

In order to promote commerce, currency is continually depreciated … as an outgrowth of policy- credit expansion. Because money is continually worth less, the incentive exists for citizens to spend it rather than hold it. Money becomes a proxy for commerce which is always worth more than money is by itself.

Trend price declines in fuel markets indicate currency appreciation; at some point the money as a proxy for fuel is worth more than anything that can be done with the fuel. As a component of energy deflation, currency preference is self-amplifying as commerce is starved of funds and worth less over time compared to holding (a particular kind of) money … which is always good for that last, emergency tankful of gas.

Leadership refuses to discuss energy and the ongoing consequences of wasting energy for lifestyle purposes. It isn’t just Europe: differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the euro other than a defective, failure-prone managing regime. Debt and waste ultimately condemns all currencies as all of them represent the elusive promises of a (low-cost) fill-up at the pump …

Energy deflation and currency preference are headwinds being faced by Greece and the other countries in the eurozone. But that’s not all. European lenders and their clients along with conniving politicians have erected a conduit scheme that is right now breaking down under the weight of its own costs.



Figure 2: The euro is a conduit scheme whereby contributors and the promoters/final recipients work together to take advantage of the conduits — the persons in the middle who are the promoters’ unwitting victims.

Conduit schemes are similar to Ponzis in that recipients gain unearned funds from others by guile and misrepresentation. Whereas Ponzis involve the transfer of savings/’investment funds’, conduits are debt transfer machines. Loans flow from contributors (banks) to recipients/beneficiaries who are often investors or clients of the same banks. The conduits are ordinary citizens who are offered vague abstractions with negligible- or negative worth that nevertheless are part of the ongoing progress sales’ pitch. The conduits are on the hook for the ongoing cost of the borrowed funds; fees, interest costs and repayment of principal: it’s his debt, someone else’s benefit.

Conduit schemes are highly leveraged. Because they are criminal enterprises there is little relationship- and much less concern regarding the ballooning cost of the funds lent to the schemes’ beneficiaries … or the conduits’ ability to meet these costs. As such, the scheme falls apart when conduits are unable to service the beneficiaries’ debts.

Conduit schemes have certain characteristics:

Conduits are coercive, gate-keeping regimes unlike Ponzis which require voluntary participation. Whether the participant borrows from the contributor or not, the costs to access the scheme’s services are set by the scheme itself, the conduit has no ‘bargaining power’.

– The benefit promised to the conduit is an abstraction: a ‘common good’ such as ‘European Unity’ … or a bailout. The abstract goods are unrelated to the actual funds-transfer.

– The transfer from the contributor to the recipient is always money, in staggeringly large amounts.

– The contributors are always entities with large capacity to generate funds; finance. The recipients are manufacturers, banking system creditors and tycoons.

– Both lender-contributors and recipients are aware of the scheme at hand and both actively promote it: falsely to the conduit (and the public), accurately to each other.

– The recipients who are part of the scam have no investment ‘method’, they simply accept the free money offered in the conduit’s name.

– The hapless conduit is incapable of acting in any interest other than those of the contributor/recipient. Taking on loans and accompanying repayment obligations are conditions of using the system in question! The process is self-limiting: those unwilling or unable to act in the scam promoter’s interest exclude themselves. The recipients gain enormous amounts of money, what the conduits receive has no worth outside of what they brought to the scam in the first place. Like the rest of the world’s industrial economy, the product of the eurozone is waste.

Greece has been rendered insolvent by the euro-scheme’s cost and its fantasy product. Every other EU country faces the same consequences because the relationship between sovereigns-and-scheme is no different from Greece. When enough conduits become insolvent, the euro regime will fall apart. Bailouts fail because they only add to the conduits’ burden.

Best thing to do is to walk away from the scheme and its false promises, to start thinking and acting independently. If enough people escape the outcome is the same as insolvency, the conduit racket unravels. Every ‘investment’ scheme requires a constant flow of new funds/credit; conduit schemes require gullible recruits willing to accept the scheme’s carrying costs. The euro racket insists its product has value … the Europeans can see the absence of value for themselves and come to their own conclusions.

Exiting the euro or introducing alternative currency.

– Because exit by any conduit would require beneficiaries to retire and service their own debts, almost every form of coercion is brought to bear to enforce the scheme. Coercion vs Greece takes the form of a ‘bankers’ strike’ depriving Greece of liquidity. Without swift, sensible action the Greek, and European economies will entirely collapse.

– The introduction of an alternative or parallel currency (unit of account) would bypass the conduit by allowing for internal Greek commerce. Information on an alternative and particulars can be found in papers by Trond Andresen – Robert W. Parenteau as well as Alan Harvey.

Alexis Tsipras; “Greece does not have the required currency reserves to support a return to the drachma.” That is, Greece cannot borrow, under any debt-money regime the country would still require external credit as it cannot provide for itself. Meanwhile, the minutes tick by, the Greek financial position deteriorates as banks remain closed and the government continues to miss interest payments.

On Greece issuing greenback euros.

Greek Outcome

Figure 3: Chart by Deutsche Bank/Zero Hedge with addendum by Steve Ludlum (2015). Note outcomes in Greece and euro area. Original chart does not show introduction of Greek fiat ‘Greenback’ euros.

– In a fiat scheme, the Greek government would issue funds denominated in euros to repay debts to Greek businesses and banks as well as individuals. This ‘money’ would have no liability attached, it is not debt-money, it would not be loaned into existence. A notable example of sovereign issue money is US Demand Notes introduced during the Civil War during the Lincoln administration by Edmund Dick Taylor. The notes were necessary because big Philadelphia- and New York banks would not lend the the government at reasonable rates.

– The current government in Greece has played into the hands of forces intent on consuming it as if Greece was itself a form of capital. Greece has become pathetic: even as it defaults it begs for more loans. Greece needs to do for itself rather than beg. The Greek government can do so by issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.

– Payments would be made electronically, out of ‘thin air’, the same way loans are made by banks … out of thin air. Payments would be made both inside- and outside the country.

– Issuance of drachmas or any parallel currency would still require Greek repayment of €320+ billion of euro-denominated debts in a state where Greece could not hope to borrow. Greenbacks would offer means for repayment … possibly even across Europe. Whereas repudiation and insolvency will break down the euro conduit scheme; issuance of electronic greenbacks would render the scheme irrelevant. Euros are fungible: Cyprus notwithstanding, each euro is the same as all others. Fiat issuance by a government is the same as fiat issuance by a private sector bank, however, there is no liability to the government issue. The government can issue without digging itself deeper into the debt hole.

– Loans made to Greece are simply issued by banks as credits on a spreadsheet. This ‘bank money’ does not exist until a loan is made. The gain from lending is the requirement on the part of the borrower to repay with money that is more costly to him than the loan is to the lender. Bank money costs the lender almost nothing to create as it requires only keyboard entries. The borrower must repay with circulating money; he cannot create repayment on his keyboard but must beg, steal or more likely borrow repayment- or have it borrowed by others in his name (bailout). Whereas interest cost tends to be a small fixed percentage of the principal payable over time, the expense of circulating money is determined by its availability in the marketplace, by supply and demand. When circulating money is scarce the real worth of repayment can be much greater than the nominal balance due, yet this is invariably when the demand to repay is fiercest, as during a margin call. If the loan is secured and the borrower cannot repay, he must surrender collateral along with other rights. These are always worth more than a keyboard entry.

The point of greenback euros is to give the government the ability to make keyboard repayments, to pay lenders ‘in kind’.

– Money created by lending is extinguished when the loan is repaid. What makes up the supply of circulating money is unpaid debts. Ironically, these are funds that are out of circulation, largely overseas or hoarded. When the sovereign issues fiat to retire debts, the borrowers’ liability is extinguished. There is no net increase in the amount of funds in circulation, which can only occur if funds are repatriated or dis-hoarded which would only take place if there is demand for them that the sovereign could not satisfy.

– By creating ‘greenback’ euros, the Greek government can recapitalize its banks directly, rather than by bailing in depositors. Over time, the flow of liquidity would temper the shortage of funds outside of Greece. A Greek repayment agency would act as ‘lender of last resort’ in place of- or alongside the (worthless) ECB.

– Issuing greenback euros would re-balance the relationship between banks and sovereigns. Creditors have gained power at the expense of sovereigns and the citizens. Greenback euros would represent power to render irrelevant the private creditors and their schemes.

– Location, location, location: Greece will always be a part of Europe. Greek exports and tourism will bring in euros and other hard currencies. Foreign exchange can be leveraged or merged with greenback issue. What would keep fiat issue local is inefficiencies of Greek transfer mechanism. Fiat euros would be more effective if issued by Italy or another, larger European country.

– The euro is the official currency of Greece, it has the same natural right to issue as does a private — crooked — bank in Frankfurt.

– External lenders would not be able to hold countries hostage by withholding funds, should they do so, the government would issue in the banks’ place.

– Whereas drachmas or a parallel currency would allow Greece to leverage its euro purchasing power by way of foreign exchange, fiat greenback euros would render such leverage unnecessary. More on this later …

Article 124 of the Lisbon Treaty does not specifically prohibit greenback euros. The Greek government would have to repeal the (pro-banking) 1927 Statute of the Bank of Greece which prohibits the government from issuing ‘money’ of any kind.

Any fiat regime would require stringent energy conservation as the external flows of borrowed euros to purchase fuel are what bankrupted the Continent in the first place.

It’s the economy energy, stupid!

– The current bailout proposal does not address any of the eurozone structural defects particularly its fuel waste and diminishing purchasing power.

– Spain, Portugal, Ireland and Italy are in the same situation as Greece. What befalls Greece will befall them. They are conduits, their debts cannot be retired, the waste of fuel-capital for lifestyle purposes provides no means to do so.

– The foregoing countries’ debts are currently assets to German firms, the benefits of the European conduit. When the debts are unpaid these assets become instant liabilities, when that occurs Germany must exit the euro or follow the others into destitution.

– Austerity is a permanent condition arising from the ongoing annihilation of irreplaceable capital. Managers need to address the resource issue directly rather than pretending it does not exist. The euro conduit scheme turns out to be a ‘blunt instrument with which to ration capital. Ironically, so also is a breakdown of the scheme! Adjustments to interest rates or bailouts will never return Europe to the ‘good old days’ of American suburban-style waste. Modernity advertises itself as a provider of abundance and prosperity, in our onrushing ‘Age of Less’ modernity becomes increasingly a harsh form of rationing and social control. What is poorly understood is the inevitability of this process.

What ties energy deflation, conduit schemes and currency preference together is credit/loans and debt. The banks have a death grip on us and our life-support system. The mechanism of funds’ dilution as debt repayment is incentive to strip-mine our entire capital base. The credit regime is falling apart under the weight of its own costs, not just in Europe. Government issue money ends a monopoly over a vital private good so that it becomes a public good, in this way the power of the banks to run our affairs is reduced. As a necessary component of this effort, the establishment must hold the financiers accountable for their crimes and negligence. The present conditions and schemes cannot be endured any longer. If the establishment refuses to act the citizens will take matters into their own hands, there will be revolutions.

Outmoded sovereignty- and policy fantasies must be thrown into the trash. The time for posturing is past, nobody is in a separate boat, there is not one labeled for Germans or Italians or ‘others only’. Like it or not every European country is a part of the world, each must carry its own burden of responsibility, which some countries such as Germany currently refuses to do.

Germany — and the rest of the world — must do with its auto tycoons what Germany has done with its nuclear variety and put them out of business. No country or economist acknowledges the ongoing drain of European credit overseas in an endless stream for petroleum energy to run the Continent’s toys. Running out is running out: as the EU runs out of credit, it runs out of petroleum at the same time … once energy deflation takes hold … it is permanent.

Voluntary conservation by way of policy is ‘friendlier’ than the alternative. Left to the status quo in Europe is nationalism and war.

Conservation by other means = Syria.

Fantasy Islanders

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on April 26, 2015

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Triangle of Doom 041515

Figure 1: We have now entered the post-economic Triangle of Doom period TFC Charts, (click on for big); the triangle has outlived its usefulness, the oil – credit markets have broken down. What remains is relentless decline … as resources along with purchasing power are annihilated.

Can we handle it? In place of hard-headed realism and a turn toward effective policy, there is denial and lies. Analysts insist lower oil prices have no affect on output. Others pretend that debt-riddled economies can be cured by adding more debt. In ways great and small, the real world offers clear warnings about consequences of consumption … but these are ignored as the establishment frolics on Fantasy Island.

From the dawn of the industrial era, companies have been able to stay afloat by borrowing. This included oil drillers: since 2008, extraction firms have borrowed over a trillion dollars at very low cost. They can certainly and reasonably expect to borrow more, after all the funds cost the lenders nothing to create. But who repays? Someone must: a firm can borrow from its own lenders for a long time but at some point the customers must step up and borrow for the firm’s benefit. Otherwise the firm’s indebtedness becomes greater than any potential number of customers can bear: at that point the firm is insolvent and out of business.

The ongoing petroleum price crash is by itself evidence that customers can no longer support the oil industry. Citizens cannot lend their own funds into existence, they must borrow from others or swap their time- and skills for (borrowed) funds. Because the aggregate worth of human labor represents a kind of upper bound to leverage, the outcome is a ‘repayment shortage’ which strands the drillers and their lenders; every additional dollar a firm borrows to stay alive is a dollar that is ultimately uncollectible from the firm’s tapped-out customers.

Stripped to fundamentals, oil use turns out to be recreational not economic. Modernity is revealed to be nothing more than ‘lifestyle’, pointless wars and other distractions. We must eat and drink to live, we drive to fill the empty spaces between television shows.

Gold TOD 042415

Figure 2: The gold futures continuous contract by way of TFC Charts, (click for big): gold has led the industrial commodity markets down, with its own break occurring in 2012. The gold price trend over the past year and a half is generally sideways. Look for similar price action in other commodities including petroleum over the intermediate term.

Gold can be sold below cost because it is indestructible whereas oil is simply wasted. Any shortage of new gold results in a scarcity premium being attached to the gold that remains above ground. The premium is real, not necessarily nominal, the beneficiaries are the gold holders who gain whether new gold is mined or not.

Selling below cost does not work with petroleum because consumers destroy it, what they gain in return is generally worthless. In this way, fuel users turn their asset into a compounding liability. Unlike gold, the petroleum scarcity premium doesn’t benefit anyone either holders (drillers or distributors) or customers, scarcity takes the form of a disruptive tax … that is ultimately uncollectible from the firms’ tapped-out customers.

Denial creates its own perverse dynamic: when low prices do not provoke the needed ‘lifestyle adjustments’ they decline further until they do. Conservation is the necessary adjustment, yet low prices are an incentive to waste more. When customers conserve there is the appearance of a ‘glut’, this in turn leads to lower prices. The outcome is a price signal that is hard to interpret, confusion rather than clarity because the consumer response to the ‘false glut’ and a real one is the same.

Real price increases can only occur when customers become wealthier relative to the drillers … when they become able- willing to borrow more; when repayment obligations can be shifted onto others. None of this is happening right now, instead customers are bankrupted by their own energy waste. Because fuel use does not produce anything; industries can only offer improved efficiency, that is, the exhaustion of what remains of our non-renewable capital at a slightly slower pace. The same efficiency means losses that must be made up with volume => diminished (non-existent) collateral for loans => less ‘growth’ and lower prices including interest cost of money. Increased efficiency means more unsecured lending, more finance industry risk along with diminished ability to properly price it; along with customer bankruptcy, these are forms the petroleum scarcity premium assumes.

A long-term resident on Fantasy Island is Ambrose Evans-Pritchard:

Oil slump may deepen as US shale fights Opec to a standstill







Continental’s Harold Hamm says US shale industry has ‘only begun to scratch the surface’ of vast and cheap reserves, driving growth for years to come.

The US shale industry has failed to crack as expected. North Sea oil drillers and high-cost producers off the coast of Africa are in dire straits, but America’s “flexi-frackers” remain largely unruffled.

One starts to glimpse the extraordinary possibility that the US oil industry could be the last one standing in a long and bitter price war for global market share, or may at least emerge as an energy superpower with greater political staying-power than Opec.

It is 10 months since the global crude market buckled, turning into a full-blown rout in November when Saudi Arabia abandoned its role as the oil world’s “Federal Reserve” and opted instead to drive out competitors.

If the purpose was to choke the US “tight oil” industry before it becomes an existential threat – and to choke solar power in the process – it risks going badly awry, though perhaps they had no choice. “There was a strong expectation that the US system would crash. It hasn’t,” said Atul Arya, from IHS.

“The freight train of North American tight oil has just kept on coming. This is a classic price discovery exercise,” said Rex Tillerson, head of Exxon Mobil, the big brother of the Western oil industry.

Mr Tillerson said shale producers are more agile than critics expected, which means that the price war will go on. “This is going to last for a while,” he said, warning that any rallies are likely to prove false dawns.






Enter the Petro-industry Ponzi buzz-words: ‘vast and cheap’, ‘flexi-frackers’, ‘energy superpower’ and ‘price discovery exercise': what is wrong with these? A: just about everything …

Hamm and Exxon have both lost billions since the beginning of the year. It isn’t just private companies: Russia, Saudia, Brazil even Islamic State have lost ‘vast’ amounts of income from fuel sales. It is nonsense to believe that these losses are inconsequential. Someone must bear them, if not the firms then the firms’ lenders and loan guarantors; if not the governments then certainly the drilling agencies which require investment funds. Every one, company and country, is dependent upon the borrowing capacity of their customers …

A large percentage of mid-sized energy firms are simply failing. So are lenders who stand to be wiped out, also Canada and its poorly conceived real estate extravaganza … also Canada banks. Don’t forget Australia; also Russia. Previously drilled wells are left uncompleted, rig count has plunged. The assumption is that shortages will re-ignite a bidding contest; however, customer purchasing power shrinks faster than the rate of depletion. This is because the elites’ share of purchasing power expands at the expense of the customers’. As a consequence, even very low prices for petroleum and other resources are unaffordable at any given time.

Fantasy Islander Jeffrey Sachs suggests American fuel- guzzling, Las Vegas lifestyles can be powered with solar panels and windmills. Sachs ignores how wimpy/pathetic these power sources are compared to gigaton carbon burning and nuclear, (Project Syndicate):


Photo of Jeffrey D. Sachs  

Jeffrey D. Sachs, Professor of Sustainable Development, Professor of Health Policy and Management, and Director of the Earth Institute at Columbia University, is also Special Adviser to the United Nations Secretary-General on the Millennium Development Goals.

ExxonMobil’s Dangerous Business Strategy

Jeffery Sachs

NEW YORK – ExxonMobil’s current business strategy is a danger to its shareholders and the world. We were reminded of this once again in a report of the National Petroleum Council’s Arctic Committee, chaired by ExxonMobil CEO Rex Tillerson. The report calls on the US government to proceed with Arctic drilling for oil and gas – without mentioning the consequences for climate change.

While other oil companies are starting to speak straightforwardly about climate change, ExxonMobil’s business model continues to deny reality. That approach is not only morally wrong; it is also doomed financially.

The year 2014 was the hottest on instrument record, a grim reminder of the planetary stakes of this year’s global climate negotiations, which will culminate in Paris in December. The world’s governments have agreed to keep human-induced warming to below 2º Celsius (3.6º Fahrenheit). Yet the current trajectory implies warming far beyond this limit, possibly 4-6º Celsius by the end of this century.

Just as the global shift toward renewable energy has already contributed to a massive drop in oil prices, climate policies that will be adopted in future years will render new Arctic drilling a huge waste of resources.






Sachs is as hopeful as Evans-Pritchard, he fusses over extraction but simply dismisses the consumption side with a breezy, hand-waving reference to: “low-carbon energy like wind and solar power, and to electric vehicles powered by low-carbon electricity.”

Low-carbon wind and solar are high cost, dispersed power sources that cannot provide the same loss-leading subsidy to industry that petroleum has offered since the turn of the 20th century. Sachs assumes that the same consumers who are too broke to afford diesel and gasoline will somehow pony up for alternatives that have greater life-cycle costs … alternatives that are themselves entirely dependent upon unaffordable diesel and gasoline for manufacture, transport, installation and maintenance.

Wind and solar might become something more than a marginal amendment to conventional grid electric or portable generators but this is hard to quantify due to intermittancy. EROI calculations tend to omit storage- and grid/infrastructure costs. Also avoided is energy cost of the factories making the turbine- and panel factories, factory components and these factories’ components in turn. Transportation and installation costs are difficult to calculate because they are not monolithic, self-contained processes but widely distributed (most panels are made in China and installed elsewhere). The manufacturing base of transportation industry is itself fossil fuel dependent.

Widespread penetration of low-carbon electric vehicles is found on Fantasy Island and nowhere else: every kind of car is possessed of immense life-cycle costs including interconnected chains of energy gobbling factories and infrastructure. There are no solar tires or window glass, no wind-turbine highways, bridges or real estate developments. Infrastructure requires steel, concrete, plastic and asphalt; all of these require work, high-density power derived from fossil fuels.

Our planetary scale built environment is likewise dependent upon ‘vast’ and ‘massive’ finance industry debt … as are solar panels and wind turbines.

Most likely, that ” … global shift toward renewable energy,” has added to fossil fuel demand where it would otherwise decline. Only indirectly has renewable energy triggered Prof. Sachs’ “massive drop in oil prices …” Solar and wind firms must borrow, in doing so they strip credit from their hapless customers … collapsing oil prices by way of the back door.

Energy Commodity Futures (Bloomberg)

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 55.74 -0.97 -1.71% May 15
Crude Oil (Brent) USD/bbl. 63.45 -0.53 -0.83% Jun 15
RBOB Gasoline USd/gal. 192.99 -0.55 -0.28% May 15
NYMEX Natural Gas USD/MMBtu 2.63 -0.05 -1.86% May 15
NYMEX Heating Oil USd/gal. 188.24 -2.56 -1.34% May 15






Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,203.10 +5.10 +0.43% Jun 15
Gold Spot USD/t oz. 1,204.22 +5.67 +0.47% N/A
COMEX Silver USD/t oz. 16.23 -0.06 -0.34% May 15
COMEX Copper USd/lb. 277.00 +0.25 +0.09% Jul 15
Platinum Spot USD/t oz. 1,171.50 +11.75 +1.01% N/A

Next to Sachs and Evans-Pritchard on Fantasy Island are the Greeks and their European bankers, (Wolf Richter):

The Greek People Just Destroyed Syriza’s Strategy







Greek stocks ventured deeper into purgatory. The ASE index dove below 700 intraday on Wednesday for the first time since the crisis days of June 2012. Then word spread that the ECB had raised the cap on the Emergency Liquidity Assistance for Greek banks by €1.5 billion to €75.5 billion. It’s the oxygen line for Greek banks. Without it, they’re toast.

The ELA provides the liquidity so that the Greeks can continue yanking their beloved euros out of their banks to stash them elsewhere before their desperate government confiscates them.

The government, under the cool leadership of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, is already confiscating €2.5 billion in “idle” cash that state agencies, state-owned enterprises, and local governments kept at commercial banks, the same banks that the ELA is propping up and that the Greeks are fleeing. Now these entities have to transfer the money to the central bank so that the government can “borrow” it for other purposes.






Did you get it? The flow of funds into and out of Greece is almost farcical. Money loaned by the ECB originates in EU banks, the ECB is a conduit. The funds flow to ordinary Greeks who remove them from Greek banks and re-deposit them in the same EU banks the loans came from; full circle! The EU banks are not deploying Greek savings but are instead offering loans to Greek depositors who are themselves are on the hook for repayment … the Greeks are in essence getting loans instead of their own money … the costs of which the depositors are attempting to dodge by hustling their funds out of Greece … Meanwhile, repayment for loans to Greek depositors are being extracted from the same Greek depositors by the Greek government!

You cannot make this s**t up. Behind the Vaudeville is the fantasy of Greece leaving (being forced out of) the euro. This is impossible, it cannot happen and everyone knows it. The only outcome is the euro lives or the euro dies.

The euro = gasoline. The Europeans including Greeks will never voluntarily give the euro up because it enables driving. Without the euro half of the Europeans would have to walk … horrors! Even if the Greeks could somehow ‘go off’ the euro, it would still circulate in Greece but outside the reach of government. Greece outside the euro would create more instability than it does now. Greeks would use the euros (gasoline) and do whatever they could to get them including discount their own ‘replacement’ currency. Jettisoning the euro would not solve euro-related debt problems, either. The problems — petroleum scarcity premium — would simply be shifted around from one country to others wreaking havoc.

Greece could dollarize but the country’s credit problems would not go away. Not because the government overspends or because the Greeks have too many overpaid workers (who sadly happen to be temporarily indisposed) but because Greeks have too many cars and cannot earn anything by driving them. Greece — like the rest of the world — is bankrupted by its own fuel waste and the uncollectible petroleum scarcity premium.

Greece is an agrarian vacation paradise with smuggling rings. It has its own currency — the euro — but acts like the currency is a gift from (banking) gods. Because Greece has its own currency it really controls its own destiny to the degree that it can buy some time and use it to wean itself from imported fuel and Northern European finance credit.

Another Fantasy Island resident is Yanis Varoufakis:

A New Deal for Greece – a Project Syndicate Op-Ed







ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece …

The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates. Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.

Our government’s position is that backward induction should be ditched. Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio. If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors.

Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.” The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.

Our partners believe that, given time, this agenda will work. If wages fall further, employment will rise. The way to cure an ailing pension system is to cut pensions. And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.

By contrast, our government believes that this program has failed, leaving the population weary of reform. The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).






More buzzwords: ‘forward-looking’, ‘reasonable’, ‘surpluses’ (who doesn’t like surpluses?), ‘sustainability': reassuring and even-tempered like the mad computer Hal 9000 in Kubrick’s ‘Space Odyssey’.

It’s pretty sad to see the genial/obnoxious Varoufakis scuffling from pillar to post, tugging his forelock like a latter-day Oliver Twist, begging criminals like Wolfgang Schäuble and Christine Lagarde for ‘more'; “Please sir, some more” … more loans of course. Without loans-constant increase in credit there is no Greek ‘industry’ … or any other countries’ industry for that matter.

Using econo-speak, Varoufakis attempts to square the circle, arguing the Greek claims to live large: “The others do it,” thunders/pleads Varoufakis, “why not us?” Solving an excess debt problem with more loans works on Fantasy Island but offers no hope elsewhere. Varoufakis cannot grasp the post-petroleum world he now inhabits, the world bankrupted by non-remunerative, resource-depleting ‘lifestyles’. Europe burns through 12 million barrels of imported crude oil per DAY, every barrel paid for with borrowed euros (BP). As a consequence the Continent is entirely-hopelessly insolvent; monetary flexibility is a myth, there is no such thing as independent policy; the price of the euro is set at the gas pump by millions of motorists buying (or not buying) fuel. The monetary- and fiscal establishment in Brussels and elsewhere are irrelevant. At the same time, Europeans have enslaved themselves to the (non)establishment status quo because the euro = gasoline.

The first thing the humans must do is face reality. What is underway in Greece and elsewhere is ‘Conservation by Other Means™’. There is no chance at the ‘good old days’ of wasteful consumption and auto-centric ‘development’. It’s over, its untenability IS the crisis … this should be clear to both the Greek government, the IMF, the ECB and the monetary establishment. The second order of business is for the Greek government — not finance or the central bank — to begin to issue euro payments to banks as well as individuals/firms in Greece who do business with the government. If Greek government can issue collateral by fiat it can issue payments the same way. By doing so the Greeks can end the imposed, artificial ‘money shortage’ that is strangling them and buy some precious time.

Greeks can then use the time gained to reconfigure their economy around conservation and husbandry, for the Greeks to begin to live within their means … they have no choice, one way or the other this is something that Greeks and others will do.

Cannibalizing the world’s capital/resource endowment for fun is at the heart of the ongoing crisis in Europe and elsewhere. The human technology experiment including its myriad mechanical toys is coming hard up against the limits set by thermodynamics. Physical forces do not negotiate, conditions are set and humans adapt … or else. The inevitable outcome should the Greeks stubbornly carry on is that the country becomes a kind of hybrid mafia gangland dependent upon smuggling and murder.

MapNobody will admit that Europe is undone by peak oil, nobody will even discuss it or entertain the possibility! This isn’t economists in 2004 missing a prediction about what might happen in 2008. This is an entire army of exceptionally well-paid, over-educated analysts, policy makers, business leaders, economists, university professors, pundits, finance- and energy bloggers, fiction writers, poets and bass fishermen not seeing what is taking place right under their noses!

Welcome to Fantasy Island …



Dead Man on the Side of the Road

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on March 6, 2015


Discuss this article at the Economics Table inside the Diner

Somebody shot Boris Nemtsov to death late last Friday evening as he was walking along a street in downtown Moscow with his girlfriend. The couple were making their way toward his apartment near the Kremlin when an unknown assailant ran up from behind and emptied a pistol into Nemtsov before fleeing in a car. The girlfriend, Ukrainian model Anna Duritskaya was unhurt.

According to her account, she was waiting for Mr. Nemtsov since 10 pm at the Bosco-café of the GUM shopping mall at the Red Square right across the Kremlin.The couple had dinner at around 11 pm Moscow time and then left the mall and went for a walk toward Vasilievsky embankment right by the Kremlin walls. Their intended destination was the posh building half a mile away from the Kremlin where the murdered politician had an apartment.

As they were crossing the Bolshoi Moskvoretsky Bridge, an unidentified man ran out of the underpass of the bridge and shot Mr. Nemtsov multiple times. Then he jumped into the passing white car without a license plate.

Mr. Nemtsov died on the scene.

Nemtsov was deputy Prime Minister in the Yeltsin government, an implementer along with Yegor Gaidar and Anatoly Chubais of the Washington Consensus, ‘shock therapy’ and market reforms of the Soviet economy. At the time, the charismatic minister was briefly considered as a potential alternative to Vladimir Putin. He most recently opposed the Russian invasion of Ukraine. Nemtsov killing is the latest in a long line of unsolved politically related murders in Russia that have punctuated the Putin regime.

Part of the mystery is how such a lurid crime could take place in one of the most tightly guarded areas in the World, under constant surveillance with hundreds of security officers nearby. The easy answer is that the officers themselves, acting covertly under orders, were responsible. Nemtsov clearly felt comfortable walking in plain view without escorts or entourage; he expected to be followed closely and under constant scrutiny by agents of the FSB. Nobody knows anything for certain, no group has come forward to claim responsibility.

Because the majority of ordinary Russians support are distracted by both Putin and Russian territorial expansion it is hard to imagine Nemtsov as anything other than an sideshow/irritant. Gunning down celebrity activists risks making martyrs out of them; this is reason for governments to be cautious. Yet, none of the Kremlin’s alleged crimes to date have triggered a backlash: like Nemtsov before his final stroll, the government — if indeed it was directly involved — appears to feel secure in its actions.

Nemtsov’s death is a component of the onrunning collapse of the Soviet Union.

Many of the places that are suffering unrest and war were components of- or client states of the USSR during its heyday: Libya (client), Egypt (a Soviet client before becoming an American client), Somalia (client), Eritrea (client), Afghanistan (client) Yemen (client), Syria (long-term client), Iraq (client); Armenia, Azerbaijan, Chechnya, Georgia, Ukraine, Dagestan, Nagorno-Karabakh (all components of USSR); also Vietnam, Laos, Angola and North Korea (all Soviet clients but wars have ended in these countries) … also Russia itself. Seen from a long-term perspective, the end of the Soviet Union government turns out not to be the bloodless event as was advertised, the rotting empire still has some collapse left in it.

One of the duties of the Economic Undertow is to turn conventional historic narratives on their heads, to where they begin make sense. What Americans have been fed about the demise of the Soviet Union is a self-serving, political/ideological fairy tale: that the United States under the direction of Ronald Reagan’s brilliant conservative leadership outspent the USSR in an arms race that eventually — along with collapsing oil prices caused by new oil on the markets from Prudhoe Bay and the North Sea — bankrupted the Communist government. Once the economic and ideological fault lines were revealed, the various client/satellite states that made up the Soviet empire peaceably went their own way without interference from Moscow. All of this ‘revealing’ and ‘peaceable-ness’ took place over a remarkably short period of time in the early 1990s: here today, gone the next.

The more realistic narrative has Soviet intelligence agencies — perhaps collaborating with those of the West along with Western interests (banks) — gaining control over Russian assets, shifting them to well-connected insiders, with the decrepit- and ossified Communist government powerless to do anything about it. This process began before- or during the Brezhnev period with matters well underway by the time of Gorbachev … Perestroika being a (feeble) attempt on the part of the Communist establishment to regain both credibility and some measure of control. What happened in Russia was not reform and the end of communism was an accident: what actually took place was the greatest crime of the modern era, the theft of an empire by the country’s intelligence services and criminal associates.

This outcome was a natural consequence of the Soviet Union as a regimented national security state with outsized spy agencies … as well as the slow commercial opening with the West beginning during the Khrushchev era. Within the immense ganglia of the Soviet intelligence- and internal security apparatus there was a kind of singularity or dawning self-awareness … the managers grasped in an instant they had access to the levers of control outside the reach of the Party, the Politburo and the Red Army. The rise of the agencies’ power was a consequence of Stalin’s paranoia; the Stalinist Russia was built on a foundation of intrusive spying and control/liquidation of potential internal enemies. Stalin held the agencies in check by way of periodic purges, no group of operatives could become too comfortable or entrenched, they had to constantly look over their own shoulders. Once ‘Uncle Joe’ was gone there were no further checks on spy agency power, they could act with impunity and did: what occurred was a silent coup d’etat with the KGB state first emerging publicly under Yuri Andropov. Once the looting and undermining was well-established in the center it spread out and took hold among the clients with consequences that can be seen clearly today.

At the same time, contact with the West, as tentative as it was, informed the Russian intelligence elite what was possible … that the Western standards for wealth and success were both qualitatively- and qualitatively superior to what was available under egalitarian communism. In 1975, to be wealthy and successful as a Swiss or Londoner far exceeded what was possible in Leningrad or Kiev.

Under this scenario, ‘Nemtsov the reformer’ was either a co-conspirator — or, more likely a tool of intelligence services and/or Western business interests; an operative within the looting scheme along with Gaidar, Chubais and others. Instead of being the heir to Stalin’s strongman legacy, Putin recedes to become the technocratic figurehead who serves to distract public attention as the Russian Mario Monti or Antonis Samaras … meanwhile, the stealing takes place in the background. The context for the Nemtsov hit becomes much murkier with a wider range of potential adversaries, not necessarily Putin but unknown ‘others’ deep within intelligence nebulae … and for possibly more prosaic reasons such as an unpaid debt. It is also likely that the Ukrainian ‘model’ had something to do with Nemtsov’s death as well; perhaps she was bait, leading him by the hand to a carefully mapped kill zone.

No doubt Nemtsov had more to do with running Russia into the ground than Western media lets on, his Yeltsin- era associates have bona-fides that raise questions:

From 1998 to 2008, he (Chubais) headed the state-owned electrical power monopoly RAO UES. A 2004 survey conducted by PricewaterhouseCoopers and the Financial Times named him the world’s 54th most respected business leader. Currently, he is the head of the Russian Nanotechnology Corporation RUSNANO. He has been a member of the Advisory Council for JPMorgan Chase since September 2008 and a member of the global board of advisers at the Council on Foreign Relations since October 2012.

Honore de Balzac famously remarked, “Behind every great fortune is a great crime;” hovering near the crimes is the criminal banker. Readers can come to their own conclusions about Chubais; regarding Gaidar, (Pravda – 2006):

Litvinenko’s death, Gaidar’s poisoning and Politkovskaya’s murder may have the same rootsDoctors in Moscow said yesterday that the former Russian prime minister, Yegor Gaidar, had been poisoned with an unidentified toxic substance on a recent visit to Ireland , adding a new twist to the Alexander Litvinenko affair.

Mr Gaidar, an economist and one of the “young reformers” responsible for privatising Russia in the early 1990s, lost consciousness and was rushed to hospital last Friday during a conference near Dublin. Last night his daughter said she believed it was “a political poisoning”. Doctors saw “no other grounds” for his sudden illness, she told the BBC’s News 24.

Gaidar died in Moscow in 2009 of coronary artery disease. He was 53; while it is not unheard of for a person to die of heart trouble at a relatively young age, the circumstances of his death … like Chubais’ relationship with JP Morgan-Chase … is suggestive.

Regarding public perception of Nemtsov within Russia, (National Interest):

In a 2011 survey of twenty-three Russian political experts, a lack of fresh faces, ideas, or practical programs aimed at helping ordinary citizens were cited as the primary reasons for the perennial failure of Russian liberalism. Along with Anatoly Chubais and Egor Gaidar, Nemtsov was named as one of those most directly responsible for discrediting liberal discourse in Russia, Unlike Chubais and Gaidar, however, Nemtsov was not regarded as being an intellectual driving force for liberalism, but rather a pure politician. For a person of such staunch principles, it must of been particularly galling to be regarded as a mere politician.

Perhaps less galling than being regarded as a spy … a stalking horse for uncertain international business interests.

The new, improved narrative fits into the theory of, ‘Zero Government’, which postulates a transition from a functioning government to technocracy as the means to loot national assets. Technocracy is the last step before default/repudiation of non-payable debts. After technocracy comes the void: ‘zero-government’; the capitulation of the establishment, its dissolution into factions and chaos. This is part of post-petroleum transition, the breakdown of the status quo. The process runs like this:

Government => Technocracy => Zero Government

The process is easy to remember for even simple- minded business tycoons and their agents, also easy enough to set into motion particularly when the thermodynamic headwinds are blowing in the world’s face.

In Russia, the Soviets made up the last, functioning government, what followed was the relatively long technocracy that was born as Perestroika and ‘Shock Therapy’ that continues under Putin. The ordinary citizens’ collective wealth was swindled away- or hyperinflated into worthlessness. Entire industries and resources were stolen- or handed off to well-positioned opportunists. Russia itself is a gigantic country with massive resources, it has taken a lot of time to steal it all, the thefts are ongoing. To fill the vacuum left by the vanished wealth there is bread and circuses: demonstrations of Russian ‘power’ and evanescent ‘personal mobility’. What comes next is economic and political breakdown — already underway — then dissipation when there is nothing left to steal = zero government.

The zero-government dynamic is not necessarily political, rather it is a component of decline in energy throughput. Governments and ideological ‘operating systems’ are nothing more than mechanisms to allocate- and manage the costs associated with energy surpluses; as the costs multiply the ideologies are stranded. Conventional wasting regimes are unable to adapt to straitened conditions where waste cannot be easily financed: zero-government is a manifestation of ‘Conservation by Other Means ™’.

Triangle of Doom 030315

Figure 1: Oil industry has become a dead man on the side of the road: WTI forward continuous contract by TFC Charts (click on for big). As Russian bosses steal everything the citizens are bankrupted => the price of crude declines. At the same time, the ability of the Kremlin to function properly unravels; citizens are murdered a few feet away from Red Square even as war rages in Ukraine next-door. The marginal oil consumer turns out be as likely a Russian as a Japanese. Under the circumstances, with increase of marginal deadbeats worldwide, it is hard to see oil prices ever increasing, certainly not to the level that would allow extraction of expensive unconventional fuels.

We can see what zero-government looks like because some of the ex-Soviet clients have already crossed the River Styx into oblivion: Syria, Iraq, Ukraine and Libya. In these countries effective government is a myth, the countries themselves are ruins. In Syria, hundreds of different militias operate without rhyme or reason, some claim regions within the country such as Rojava Kurds or Islamic State; others control a neighborhood or a few blocks in a city … or they control nothing at all! Syria has descended to bellum omnium contra omnes, Hobbes’ war of all against all. At this point, whether Syria has resources or not is particularly relevant because there are no means or opportunity to extract them.

The militaries of a dozen Western- and allied nations operate with impunity within Syria’s territory without any legal basis, declaration of war, absent any aggression on the part of Syria in complete disregard of the country’s (non-existent) sovereignty. It is the concept of sovereignty itself that is disintegrating right under everyone’s nose; even putative states offer non-state alternatives to conventional nationality. Syria’s armed trespassers include Iran, Jordan, Israel, UAE, Qatar, UK, US, France, Hezbollah/Lebanon; last week, Turkey. Bashar al-Assad is ‘leader’ in name only, and that in only within a relatively small part of the country. Even if he were to somehow magically make the militias vanish overnight he would not be able to govern. Syria has been so reduced by violence and natural disaster that it has become unmanageable. Assad is damaged goods, anyway … credibility he might have at one time possessed has been destroyed along with the cities his air force has flattened with barrel bombs.

The tragedy that has overtaken Syria … that has rendered millions of its citizens into refugees … has many more years to run according to those who are in the best position to know.

There is little difference in Iraq where the south of the country has become a de-facto province of Iran, where the Baghdad government is made up of Iranian spies … all of this taking place with the acquiescence/participation the United States, nominally Iran’s adversary. The tapeworm process that was perfected in the Soviet Union has been applied without mercy to the Iraqis … with dire consequences. One only needs to examine both countries together to see the process play out. Unlike Russia, theft in Iraq has been accompanied with wanton, high-tech devastation. The country has been bombed and rocketed flat, then lavished with artillery with over a million deaths. Roaming across the north-western and central parts of the country is an alphabet soup of militant groups bent on outdoing each other in corruption and barbarity. Like Syria, Iraq has become a free-for-all Western militaries and their regional allies all acting without restraint … except those imposed by their own onrushing bankruptcy.

Ukraine has been looted by a succession of corrupt post-Soviet governments, what remains is to fight over the scraps. The country is fast becoming a Syria on Europe’s doorstep, a theater of operation for countless militant battalions fighting each other for ‘gains’ that evaporate as soon as they are obtained. Ukraine, like the other countries — and Libya too — has resources, but ‘zero-government’ leaves these in the ground … this is what conservation by other means ™ amounts to.

When the wars finally die out due to exhaustion of combatants, these countries will become sparsely inhabited wastelands.Without economic growth/business expansion, without the increased flows of energy, without decrease of energy efficiency that drives all business expansion, there are no means to recover after wars- or other disasters. Managers either understand the implications completely and are too corrupt to care … or they refuse to understand because the implications are too frightening.

The zero-government world that we are now entering into is not at all like the one that the human race has occupied for the past five-hundred and fifty odd years, there is no more growth to it. For Syria or others to rebuild some prosperous countries such as France or Canada — or China — must fall into ruin; for anyone to gain others must lose. If this is not serious business then such a thing does not exist.

Zero-government is literally what it says it is; a one way state of existence whereby a country is rendered into an administrative vacuum that convention cannot occupy. The rot of technocracy leading to zero-government is plainly evident not only in Russia but in the West as well: the American and European governments are riddled with corruption and self-dealing, irrelevance and denial. Ballooning intelligence services and ‘internal security’ agencies gain ascendency/tighten their grip. What saves the West so far is that its property is already mostly owned by the thieves; they can only steal from each other. Issues are disregarded or waved away; there are no more statesmen only advertising managers and shallow demagogues offering blatant lies/crowd-pleasing distractions. Meanwhile, in the background a thermodynamic process that cannot be negotiated with is steadily and relentlessly underway …

Black Swan Dive

Off the keyboard of Steve Ludlum

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Published on Economic Undertow on January 7, 2015

Be careful of what you wish for, you might get it.
— Proverb

Triangle of Doom 010115

Figure 1: Triangle of utility function by rational agents; by TFC Charts, (click on for big). In a cash economy the inability to afford crude oil would manifest itself as the steady decline of ‘too high prices’. Our economy is built around structured finance; once credit structures are undermined they collapse.

Discuss this article at the Energy Table inside the Diner

There is a ‘perfect storm’ underway; of insolvent customers, over-stressed finance, willful ignorance on the part of the establishment and denial. Both commodity prices and US Treasury yields are indicating another recession. Customers and drillers are asking how low will fuel prices go and how long will they stay there?

Fund manager Jeff Gundlach responds that no one will know until they stop falling. “That answer isn’t meant to be cute,” he says. “When you have a market that showed extraordinary stability for five years — trading consistently at $90 [a barrel] or above — undergo a catastrophic crash like this one, prices usually go down a lot harder and stay down a lot longer than people think is possible.”

Because modern ‘labor’ is waste, the customer must borrow … or some firm or institution must borrow for him. Workers have been able to gain greater amounts in wages in the past when fuel was less costly: wages are credit, high wages represent the historical productivity of credit. Prices cannot rise further because the ability of customers to earn (borrow) is constrained by (relatively) high crude prices, diminishing the productivity of credit.

There are two sets of borrowers: customers and drillers. Both need to borrow to gain fuel. The borrowing requirements of the driller increase over time because he is constrained by geology while the customer is limited only by access to credit and to wasting infrastructure. At the same time, the customer must take on the drillers’ debts by bidding for- and buying fuel. The relationship between the sets of borrowers conforms to simple game theory:
Crude Game Theory 1
Figure 2: Energy relationships in 1998 and prior, drillers and customers each borrowed or didn’t borrow. Not borrowing by both meant no economy and no petroleum produced which obviously did not occur. Both customers and drillers chose to borrow: drillers added to excess petroleum capacity making fuel more affordable. Customer borrowing became added gross domestic product (GDP). This amplified driller borrowing which made even more crude available at still lower prices! During this period, there was no need to allocate between drillers or customers.

From 1998 onward, the productivity of each dollar invested in crude production over time has continually declined. This is the basis for the Undertow argument that Peak Oil occurred in 1998: that the baleful economic effects predicted to occur after Peak Oil started to be felt in 2000. To gain more crude oil drillers were required to add more wells, each well was more costly than the last, each well offered less crude oil than previous wells: the effect of this effort has been felt by oil consumers who have had to compete with the drillers for each dollar of credit.
Crude Game Theory 2
Figure 3: Post-1998, brutal new game theory: mutually assured (demand) destruction!

Borrowing by customers returns less GDP, borrowing by drillers returns less crude. When drillers borrow alongside their customers, they cannot keep pace because demand is easier to create than supply: automobiles are more easily had than new oil fields. Attempting to add to GDP (borrowing by customers) increases demand for crude which exhausts inexpensive fields faster, this in turn adds to the credit requirements of the drillers, returns diminish and borrowing costs pyramid. The outcome is the same as when neither drillers nor customers borrow, there is no economy, all are bankrupted by costs.

The alternative is for the customer to borrow at the expense of the driller or the other way around. Both customer and driller now compete for the same credit dollar: the customers’ need for funds is absolute, they must borrow more than drillers or they cannot buy anything and there is no GDP growth. Drillers need for funds is absolute, they must borrow more than the customers otherwise there is less fuel for the customers.

Unlike finance, petroleum is a bottom up business. At the end of the day every drop of oil/refined product has to be bought by a customer. Because there is so little return on what he does with the product he must borrow to pay for his purchase. He borrows, his boss borrows, his government borrows, his nation borrows other countries’ money (borrow by way of foreign exchange). Our economies are nothing more than interconnected daisy-chains of loans. Over time these chains have grown to amount to hundreds of trillions of dollars. As debt piles up it can only be serviced and retired by taking on more loans.

Even as the US makes less in the way of physical goods like clothing, shoes, washing machines or table radios, its Wall Street firms manufacture the bulk of the world’s credit; this is needed to substitute for absent monetary returns for just about everything else. Driving a car does not pay for the car (times- 1 billion cars), nor does it pay for the fuel, the roads, the massive governments including costly military endeavors, nor does driving pay for the ordinary costs of finance … risk premia and interest carry, which have ballooned exponentially. Other than for the smallest handful of customers — transit, construction, farming, delivery, emergency/first responder — customer use of fossil fuels and other capital is non-remunerative waste, for pleasure-fun, convenience, status, etc. The fashionable wasting processes — including fuel extraction industries — are collateral for more and more loans.

The simplest of models is all that is required to see where this ends up: subtract the costs of petroleum extraction from the small use that provides an actual return. This difference is the price that the economy can actually afford to pay without the use of credit. With extraction costs rising — which cannot be denied by anyone — and with actual returns being very small, the output of the model looks to be a negative number. What that implies is the price of fuel will fall all the way to zero with nothing to be done in the way of ‘administrative adjustments’ to alter this outcome.

Managers appear to be helpless because they have thrown everything at the economy but the kitchen sink: key men have been propped, banks bailed out; interest rates across all maturities are near zero, real rates are negative- or nearly so. Governments around the world are at the borrowing limit, there is little in the way of good collateral remaining for central banks to take on as security for new loans. Conventional marketplace fixes such as debt jubilees/write-offs, re-distribution, bailouts, stimulus, austerity policies, monetary easing, etc. are efforts to reclaim resource capital that no longer exists. Remedies accelerate unraveling process by increasing gross debt (claims against capital) while exposing remaining capital to consumption at higher rates. The capital ‘pie’ cannot be created anew or redivided, only a new and much smaller pie is to be had and carefully tended. Our smaller pie of non-renewable resources is what we have to make use of, to last us and the rest of the world’s creatures until the end of humanity.

Managers certainly understand but refuse to acknowledge that resource extraction over extended periods has consequences. Nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions. A grand civilization at the height of its power has not exhausted its prime mover since the Romans stripped their empire of firewood beginning in the first century BCE, precipitating its decline.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 48.82 +0.89 +1.86% Feb 15
Crude Oil (Brent) USD/bbl. 51.18 +0.08 +0.16% Feb 15
RBOB Gasoline USd/gal. 133.95 -1.48 -1.09% Feb 15
NYMEX Natural Gas USD/MMBtu 2.88 -0.06 -1.97% Feb 15
NYMEX Heating Oil USd/gal. 170.08 -2.54 -1.47% Feb 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,212.20 -7.20 -0.59% Feb 15
Gold Spot USD/t oz. 1,215.30 -3.28 -0.27% N/A
COMEX Silver USD/t oz. 16.54 -0.10 -0.58% Mar 15
COMEX Copper USd/lb. 276.15 -0.55 -0.20% Mar 15
Platinum Spot USD/t oz. 1,221.25 +1.81 +0.15% N/A

Graphic by Bloomberg:

– Energy deflation is when increased fuel demand relative to supply does not cause prices to rise but undermines the ability of consumers to meet the price even as it falls. This is what is taking place wherever one makes an effort to look. A component of the onrushing crash is the easy money policy in Japan/Abenomics added to the other bits of monetary stimulus in other currency regions. It isn’t the end of the policy that is causing the crash but the policy itself as purchasing power flows from customers toward big business (drillers) and lenders. More easing => more purchasing power diversion => less credit => lower fuel price => more bankruptcies => more credit distress => more easing in a vicious cycle. What drives the process is the foolishness of central bankers who do not understand the consequences of their (obsolete) policies.

– Drillers rely on loans, lease flipping and share offers than upon revenue from sales, this is largely because of higher costs which would otherwise leave them underwater. The fracking boom and other expensive second-generation extraction regimes are as dependent upon structured finance as the real estate plungers were in the US beginning in 2002. The ‘waterfall’ decline in oil prices suggest that financing structures are coming undone. Finance innovations such as CLOs disguise risk and shuffle it around rather than eliminating it. When risks ultimately emerge they overwhelm the structures intended to manage them; hedging strategies rebound against hedgers, those that can race for the exits, the rest suffer severe losses as the prices collapse.

– It is possible that energy companies’ hedging strategies are contributing to the ongoing crash the same way ‘portfolio insurance’ abetted the stock market swan-dive in 1987: that is, sales of contracts in futures markets in order to hedge finance losses, elsewhere.

Because the leverage structures cannot simply reconfigure themselves after they collapse, oil prices cannot ‘bounce back’; a replacement credit regime must take the place of the broken system. Shadow-banking was vaporized by the housing crash in 2008; it was imperfectly replaced by a generalized credit expansion by way of Treasury borrowing along with central bank moral hazard: both of these offer diminished- or negative returns which is why this regime looks to be failing now … with nothing to replace it.

– Every dollar of price decline cuts output. Any oil that would be available at the higher price is removed from the market when prices fall. As the price declines, the only fuel available is that which costs that amount to extract or less:

Canada oil prices 010615

Figure 4: Prices for selected petroleum-fuel plays from Scotiabank (click on for big). Sub-$50/barrel prices looks to shut in as much as 3 million barrels per day, a cutback equal to a third of Saudi Arabia’s output. Price decline is the industry’s fuel cutback mechanism, no other actions by drillers, nations or organizations such as OPEC are needed. This is another component of energy deflation; the only issue is how cuts will affect the customers.

Fuel cutbacks do not occur overnight: contracts between drillers and refiners remain in force and there is inventory in storage. Drillers will borrow as long as they are able to, hoping for a miracle. As the contracts are satisfied and inventories depleted uneconomical supplies will be shut in leaving what remains of lower-cost fuels. Under the circumstances, this remaining supply would likely be hoarded as it would be worth more than other possible uses.

– ‘Dollar Preference’, from the Debtonomics series is the convergence between the value of oil capital and the dollars that are exchanged for it. Fuel by itself is worth more than the real-world enterprises that waste it regardless of what means are used to adjust the price. Enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, gaining- and making use of credit is their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the burdens onto others.

Management is paralyzed by the internal contradictions of the debtonomy. We cannot get rid of (some of) the debt without getting rid of (all of) the wealth. We cannot get rid of the debt because we would need to take on even more ruinous debts immediately afterward to keep vital services operating such as water supply. If we get rid of the debts the prices will fall leaving debt-tending establishments without investment funds. Our debts cannot be rationalized, the absence of debts cannot be tolerated. The debt system is rule-bound. Debts that were increased because of favorable rules face annihilation because of the same rules, changing the rules threatens debt elsewhere. Nowhere are there real returns to service the debts much less retire them. Nothing remains but the arm-waving of central bankers. As the banks create more debt (against their own accounts), their efforts are felt at the gasoline pump which adversely effects debt service.

The debtonomy is Gresham’s Law applied (on purpose?) to goods and services; the bad drives out the good, the worst drives out everything else. The ‘bad’ enterprises which groan under massive obligations possess a competitive advantage over the virtuous ones that earn without taking any debts on. Debts are artificial earnings which are used to price the good companies out of business then engulf their markets. The final step is for the debt-gorged monstrosities to fall bankrupt due to their massive size, these are then bailed out by the even-more bankrupt sovereigns.

Energy guru Chris Cook uses the term ‘Upper Bound’ to describe the fuel price level that constrains economic activity. The price rise can be caused by increases in the available credit or by a decrease in the amount of available fuel relative to the current credit supply.

What happens at the other end of the bound? If the upper is tough to deal with the lower is good, right?

It goes without saying that the crude is vital. The ‘Business of debtonomy is debt’ but the presumption is of fuel waste for a ‘higher purpose’ which is embodied within our progress narrative. Without continuous waste debt becomes an unsupportable dead weight on all enterprises. Here is the confusion over the effects of fuel shortages on economies: ending waste is thrift, it is economical to do so. Ending waste is fatal to our debtonomy which needs the waste to justify its existence: economic thrift is an un-debtonomic catastrophe.

It is different this time: the decline of the fuel price means there is less fuel made available to waste, that the high cost variety is off the market. Low priced fuel means there are no businesses with credit. Lower price fuel is worth more than any enterprise that uses it, the lowest possible price means the industrial scale fuel waste enterprises are ruined, both producers and consumers.

The decrease in the dollar price of crude is ipso facto marketplace repricing more valuable dollars. The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes other currencies as well as dollar-denominated credit.

Just like the upper bound where a dollar is worth less with each increase in fuel price, the lower bound represents a dollar that is worth more because of its price in crude. A low crude price has a dollar that is worth too much to be used for carry trades or interest rate arbitrage which is the primary business activity within the debtonomy.

The lower bound is reached when currencies are discounted to dollars. A reason for this is the universality of the dollar. Because the US has been for so long the world’s consumer of last resort, goods that were sold for dollars in the US are tradeable everywhere in the world for the same dollars. The dollar purchases of the past and dollars in circulation now are the purchasing power of the future.

The dollar is also the world’s reserve currency, dollars being used to settle trade accounts. The trade of goods between countries whose currencies are illiquid may have foreign exchange risks that exceed the profit to be had by way of the trade. The exchange of the currencies for dollars bypasses the risks because the universal dollar is a liquid, stable substitute for third-party currencies. Reserve status of the dollar and its universality provide leverage that other currencies do not possess.

The trade of dollars for crude sets the worth of the dollars rather than do the central bank(s), this trade takes place millions of time a day at gasoline stations all over the world.

Motorists determine the worth of money; this strands the central banks. In their futile attempts to assert some sort of relevance the central bankers and policy makers manipulate interest rates, pillage bank depositors, ignore moral hazard and bail out their friends. They seek to reduce the worth of money relative to other money. In doing so the bank surrenders what small fragments of policy-making ability which remain to it. Bankers can set interest rates to zero but no further, can whitewash the accumulation of risk but cannot set the money price of petroleum except to make it unaffordable which precipitates the catastrophe the bankers are desperate to prevent.

The catastrophe the bankers are desperate to prevent is the destruction of demand, where fuel falls into strong hands and dollars are hoarded because they are proxies for scarce petroleum, energy in-hand.

For this reason, dollar preference effects net energy which is consumption taking place in energy producing countries. This consumption is entirely dependent upon consumer goods that are affordable because of high fuel prices. Russians produce automobiles and other Russians buy them because the national oil companies are able to sell their product for +$100 per barrel. The price subsidizes both Russia’s debts and her energy waste. Ditto for the energy consumption of Saudi Arabia, Iran, US, Kuwait, Iraq and all the rest. When energy prices fall so will energy consumption in producer countries if only because lower priced oil production will be too scarce to waste.

At $10 per barrel, Russia will produce very little fuel, only from the cheapest and easiest to produce fields and will trade it for hard currency only. Domestic sales will take place in black markets for dollars or gold, few Russians will have dollars and those that do will hold onto them for emergencies. Hard currency earned by the export of crude will be used to buy food and medicine, not imported luxury automobiles and television sets.

Diminished net exports are dependent on high prices which are in turn dependent upon constantly expanding credit. When cash is preferred over credit there is nothing to support the high prices or fuel waste. Cash is hoarded and credit is evaporated.

The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold which was necessary to settle contracts. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.

Dollar preference is self-limiting. Dollar preference in 2015 is the demise of the euro, yen, ruble, peso, real … their unraveling illuminates widespread mismanagement. Doubts about currency regimes take root. The differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the rest which starts the clock on the ultimate death of the dollar.

Peak Oil…

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on December 24, 2014


Discuss this article at the Energy Table inside the Diner

Part of the current frenzy about energy prices is the insistence on a petroleum ‘glut’. According to conventional wisdom, there is simply so much excess crude on the markets there is nowhere for oil prices to go but down.

The reasons given for the excess crude are many: Saudi intransigence, a Saudi-US geopolitical contest (price war) with Russia/Iran, pesky futures’ market speculators … because/in spite of the president, because/in spite of the governments energy (non)policy … because of clear and concise leadership from Congress. Excess crude is the incredible free enterprise system working its magic! There is a glut of crude because Americans are incredibly clever and hard-working, because they are too fat/not fat enough … because they take too many drugs/not enough drugs, are red (blue); because our brilliant technology has permanently solved the problem of shortages so that our greatest challenge is to manage the onrushing, cornucopian abundance …

Keep in mind, a glut or the appearance of one makes sense at the oil extraction peak, after all, what is a ‘peak’ but the period of the greatest rate of extraction? There cannot be more petroleum available any time than at a peak. All that remains is for consumption to sort itself out; our brilliant-as-technology marketplaces will take care of that by themselves. Glut = cheaper crude! It’s morning in America, again!

That’s can’t be what’s happening … there has to be some mistake. What goes down must go up, right? If prices drop too far the entire extraction industry will go out of business, that the prices have crashed indicates half the industry is already out of business, it just doesn’t know which half it is yet.
Staniford-Oil 122214

Figure 1: various rates of extraction from multiple data sources compiled by Stuart Staniford, this chart is from December, 2013. The top line indicates 92 million barrels of various flammable ‘liquids’ per day including bitumen, natural gas plant liquids and biofuels.

The increase in petroleum volume isn’t necessarily a blessing as the energy content of the newer fuels is no greater than that of smaller volumes seven- or eight years ago. The increased volumes cost more to extract, transport and process so the net-energy yield is less. Regarding conventional crude, the likelihood is that the output peak occurred in 2005.

Every single one of the billions of barrels indicated on this chart have been burned up for nothing. This is the topic that is never discussed, never even acknowledged; our incredible permanently extinguished oil. There are literally zero returns for the precious capital we have burned, nothing to show but junk. This is the collateral for all of our (borrowed) ‘money’ … and the reason why we have financial ‘difficulties’. The dollar and other currencies are backed by fraud, used cars and smog.

Given that the world is at some sort of peak right now, what happens afterward? Because the world has not experienced a peak of existential magnitude before, we tend to make assumptions about what to expect. One assumption is that technology will provide substitutes, higher prices will allow extraction of deeper, harder to extract reserves. In this line of thinking, nothing really changes because extracting crude oil and using it has always been a costly endeavor, it will be a little more costly but manageable.

The plunging price of crude oil does not reflect the cost of extracting it or finding substitutes but rather the paucity of return on its use. This is sensible because returns are what are supposed to pay for extraction- plus a profit. What pays instead are sub-prime loans made against promises of bottomless production rather than actual remunerative use. The highest and best use for crude oil and related goods has been as subjects in a Wall Street finance shell game which is undone by the crash in crude prices … and crash it is, (Bloomberg):

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 55.26 0.00 0.00% Feb 15
Crude Oil (Brent) Hammered again USD/bbl. 60.13 -1.25 -2.04% Feb 15
RBOB Gasoline USd/gal. 153.50 0.00 0.00% Jan 15
NYMEX Natural Gas USD/MMBtu 3.14 0.00 0.00% Jan 15
NYMEX Heating Oil USd/gal. 195.14 0.00 0.00% Jan 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,179.80 -16.20 -1.35% Feb 15
Gold Spot USD/t oz. 1,177.06 +0.62 +0.05% N/A
COMEX Silver USD/t oz. 15.69 0.00 0.00% Mar 15
COMEX Copper USd/lb. 287.25 0.00 0.00% Mar 15
Platinum Spot USD/t oz. 1,182.88 +0.88 +0.07% N/A

Individual countries are going through the Peak Oil process making it fairly simple to see what sort of outcomes can be expected … these are generally ugly.

Mazama-Egypt 122214

Figure 2: Egyptian crude imports, exports and domestic consumption. Map- graphics by Mazama Science; data by BP. Egypt’s oil output peaked in 1995 at roughly 1 million barrels per day and has followed the classic M. King Hubbert decline curve since then. At its peak, Egypt was a substantial exporter, since then it has become a socioeconomic basket case, increasingly dependent upon both dollar- and fuel subsidies from the US and Persian Gulf states plus the meager returns from the European tourist trade. The country’s fabulously corrupt, autocratic government pretends to manage its zooming human- and auto population, Islamic militancy in the hinterlands, diminished foreign currency reserves and ballooning external debts. Like many other producing countries, Egypt offers, albeit in diminished amounts, subsidized fuel for its millions of worthless cars.

Explosive unrest occurred in the country in 2011 as part of the Arab Spring. Egypt’s management was able to keep the lid on the mid- 90’s as long as there was an increase in marketable fuels, once supplies tightened so did the grip of poverty and a sense of middle-class hopelessness.

Mazama-Nigeria 122214

Figure 3: Crude oil extraction never allowed for a Nigerian ‘golden age’ as much of the returns from sales were stolen by elites. Output increased sharply beginning in the 1970s. It is possible that the peak occurred during that period or later, in 2010. It is hard to say because much of the country’s crude is siphoned off by criminal gangs or spilled from the country’s leaky pipeline infrastructure. Like Egypt, post-peak Nigeria is slowly becoming a hospice patient with grinding poverty, instability and a thievishly inept, autocratic government. Like Egypt, Nigeria is plagued with militants who make life miserable for farmers and villagers in the northern hinterlands.

High crude prices over the past few years allowed the Nigerian establishment to take on the appearance of stability and to paper over some of its economic problems, one such effort has been subsidies for millions of drivers. Lower overall crude prices can do little but cut ordinary citizens’ purchasing power while intensifying the Nigerian elites’ urge to steal as much of the country’s remaining portable wealth as they can and remove it from the country while they still have the chance.

Mazama-Iran 122214

Figure 4: Arguments regarding ‘above-ground issues’ notwithstanding, the peak of Iranian crude production occurred in 1974. The output bumpy plateau from 1990 to 2012 has kept the country ‘open for business’, but the story so far appears to be that of a mature fuel producing region that now extracts less — for whatever reason. At the same time domestic consumption is relentlessly increasing largely due to fuel subsidies for motorists. Like other petro-states, Iran is controlled by an autocratic regime that rules by fear, informants and secret police. Recent high crude prices have allowed Tehran to fund a proxy war against Saudi Arabia for hegemony over the Middle East. Iran also funds ‘resistance’ to Israel at the same time pursuing a costly, pointless nuclear weapons program. The high prices + hard currency inflows by way of Dubai have tended to counteract the effects of international trade- and economic sanctions against the country. Those days are over: lower prices and dollar shortage will amplify the effects of sanctions and certainly act to constrain Iran’s influence, its solvency along with its ability to wage proxy war against ideological- but otherwise almost identical adversaries.

Mazama-Russia 122214

Figure 5: Under the lash of Soviet commissars and the prodding of Five Year Plans, Continental Russia experienced its output peak before the regime collapsed in the late 1980s. Since then, Russian output recovered to some degree but the oil experts within Russia admit now that future output will irretrievably decline.

As in Iran and Egypt, the long, post-peak interval in Russia has been marked by a slide into despotism, sputtering external conflicts, internal repression, harassment and spying, loss of liberties and varying degrees of economic hardship. The role of the ordinary citizens within the current regime is to bear the regime’s ballooning costs: the outcome is a race to remove portable wealth from the country as fast as possible. Russia subsidizes its energy consumers which accelerates depletion, mostly natural gas. Instead of leveling the economic playing field, subsidies divert funds to drillers, toward Russia’s elites, with the customers as conduits.

High crude prices have allowed Russia to keep up pretenses. Hard currency inflows counteracted the effects of the Russian government’s incompetence and corruption. Lower prices and a dollar embargo will have the opposite effect, magnifying Russian leadership failures and burying Russia’s economy: go to sleep in Moscow, wake up in Cairo.

Mazama-UK 122214

Figure 6: the word ‘England’ looks to mean ‘unending crisis’ as the country’s petroleum fuel resource was dumped on the world markets for narrow political advantage in the mid-1980s and ’90s with the peak output occurring in 1999. Since then, England has been experiencing what can only be called a ‘Long Descent’ into the energy abyss. Along with the other post-peak examples, England suffers from incompetent and increasingly autocratic government and an economy undermined with fuel subsidies on one hand, unpayable debts on the other. The UK’s economic assets are opaque derivatives and pricey houses for tax exiles in central London. Its liabilities are millions of guzzling automobiles and a hodgepodge of poorly considered, blindingly expensive energy megaprojects that have zero chance to solve the country’s problem … if they are ever finished! England and fuel-starved Japan look to be the world’s first credit providers to default or experience runs out of their respective currencies.

Low prices will hammer what remains of the UK’s petroleum industry which is almost entirely offshore. This version of the Seneca Curve will leave Britons more dependent upon imports … and an increasingly shaky pound. Worst-case scenario would have UK looking to buy hard to find dollars at any price in order to gain fuel; conservation taking the form of a bitter and cruel comeuppance.

Mazama-Australia 122214

Figure 7: This is what denial looks like: Australia’s peak occurred in 2000, since then fuel output has relentlessly declined alongside Australians’ galloping internal consumption. Australia government has coped by becoming increasingly inept. As the coal- and iron miner to China, Australia has been able to avoid some of the worst outcomes that afflict other post-peak economies. If nothing else, lower China consumption and the more costly US dollar will end the lucrative carry trade that has subsidized Australian credit expansion and wasteful consumption.

Mazama-Argentina 122214

Figure 8: Argentina’s oil output peak took place in 2002, the same time auto-driven consumption began to increase; like other oil nations, Argentina subsidizes consumption. The outcome as been creeping bankruptcy … default, hyperinflation/currency collapse, goods-shortages and riots, instability, increasing poverty; all helped along by the usual inept, thievish government(s). Lower prices and the broken Argentine economy look to strand drillers leaving the country to import fuel … if citizens can find the dollars to do so.

Mazama-Venezuela 122214

Figure 9: Venezuela’s peak was in 1970 … it has been a roller-coaster ride since. Output- and price fluctuations have since played havoc on Venezuela’s clownishly inept governments and flailing economy. If oil bounty is a curse, the depletion of bounty is descent into Inferno: as in Argentina, there is government corruption, inflation/hyperinflation, instability, social unrest. Even though the country is bankrupt, the government subsidizes fuel for its non-remunerative fleet of worthless automobiles. Venezuelans can use their last tankfuls of gas to drive to the poorhouse …

Mazama-Mexico 122214

Figure 10: Poor Mexico; so far from God, so close to the United States. Mexico’s petroleum story has largely been that of the super-giant Cantarell oilfield; its peak was in 2005. Since then, Mexican output has declined despite much hand-waving on the part of the Mexican establishment. Up until recently, petroleum extraction was nationalized, Mexico also subsidized motor fuel consumption. Along with the baleful effects of NAFTA and the burgeoning drug trade to the US, Mexico suffers the usual economic- and political rot found elsewhere in other oil states: sclerotic government, wrenching poverty, corruption, pollution with drug mafias standing in for the ‘Brand X’ militants found elsewhere.

Mazama-US 122214

Figure 11: The USA peak in 1970 looked to be overtaken by new output from Bakken and other shale plays leading to throaty proclamations of ‘energy independence’. Even with shale additions, US finds itself importing six million barrels per day; ongoing reductions are due to creeping impoverishment and less consumption. As with other countries the US massively subsidizes petroleum consumption:

Oil Subsidies 122214

Figure 12: Industrial nations’ fuel subsidies by way of BBC/IMF: The cost of subsidies ultimately proves to be unbearable even for petro-states with large reserves such as the US. Subsidies are a primary driver of declining net exports. Subsidies directed toward consumers flow immediately from them to the drillers: they are loans, laundered by way of governments from the same customers who receive them. As with monetary easing: more subsidies => more bankrupt customers and ultimately, bankrupt drillers.

Most oil states post-peak share the same characteristics: inept, pilfering, absolutist regimes, faltering economies overburdened with debt, over-reliance upon subsidies; there is war, militancy and social unrest. Some of these countries face more of some problems and less of others. Of the oil ‘producers’ that are post-peak only a handful, such as Norway and Denmark, have been able to maintain a tentative of political-economic equilibrium.

Mazama-Denmark 122314

Figure 13: Denmark’s extraction peak occurred in 2005, Norway’s in 2002. It would appear the best way to cope with oil peaking is to reduce consumption, for countries to become more like Denmark and less like Argentina or Egypt. Consumption in Denmark has declined by more than half since 1973; for it to decline by half again over the next ten years does not look to be a big problem.

With world-wide financial repression and the propping up of key-men everywhere, any energy crisis initially will not take familiar forms: gas lines, rationing and highway speed restrictions. Instead, the crisis will emerge as a credit crunch which is underway right now. Credit is being systematically revealed as worthless, leaving the fuel industry to provide for those elements of the fuel-use economy that can pay for themselves. This amounts to a very small fraction of current ‘use’ which is mostly for entertainment and pleasure.

It is hard to see how prices can rise in real terms from here.

Purchasing power rests more with the tycoons. Given enough deflationary medicine and tycoons will be just as broke as the rest of us. Purchasing power is the equivalent relationship between a good that is exchanged and what is gained for it: one is always worth the other; otherwise the exchange does not occur. Capital is non-renewable resources, it is the ultimate good, the basis of all ‘production’; as capital is depleted or diminished for whatever reason, so is purchasing power.

Customers must buy the fuel products that allow the drillers to retire their own loans. Customers can only buy when they borrow themselves … or after their employers borrow in turn from their own customers. The cost of ongoing oil peak = fewer customers borrowing overall, they have been fired, lost their businesses, have had their wages cut or they have other more important costs to meet, like food, housing or medical care.

Every post-peak country is in the same boat. China is slowing … because Americans and Europeans are buying less Chinese-made goods with borrowed money => less purchases from Australia and other resource providers. Large swaths of the world are embroiled in conflict which is a dead- loss to all sides. There are fewer places for any bid going to come from. How are prices going to rise?

“Central banks will print money,” is the usual nonsense refrain. Central banks cannot increase purchasing power, they can only dilute it. Finance can lend but the cost of moral hazard — a kind of indirect subsidy — has risen to where even largest governments cannot bear it. More loans won’t work anyway: money flows to drillers starving customers of funds leaving nobody to retire the drillers’ loans.

At the same time, oil states need to sell as much as they can to gain what cash-flow is possible. All petroleum is high cost now b/c of the need to work over old, depleting fields. Drillers are frantic to make up their losses on volume …

There is nobody with a handle on this situation, it is running away on its own.

Oil Shock

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on December 10, 2014
Triangle of Doom 120414Figure 1: Triangle of Pants by TFC Charts, (click for big). What is taking place right now is an oil shock very similar to that which occurred in 2008-09. What triggered the current reaction was $105/barrel a few months ago as opposed to the much higher 2008 price. The lower price confounds expectations, convention leads us to believe that any fuel price shock would result from prices higher than $147 per barrel.

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Since 2008, the world has become poorer; what remains of purchasing power has been diverted away from ordinary customers toward elites. Monetary- and fiscal policies around the world have amplified this flow making it difficult for customers to buy industrial goods including oil. By catering to crony ‘friends’ the central banks and governments have been working against their own stated interests, precipitating the very crisis they have been working so hard (?) to avoid.

The hope: more easing => lower money cost for drillers => price bubble ‘hedge’ against high- and increasing crude price => more financial market support for drillers. Finance makes money lending to all concerned.

The reality: more easing => more tycoon ‘success’ => more customer insolvency => lower crude prices => deflation => finance-lender bankruptcy => driller distress leading to more easing. Finance fails as customers are unable to retire firms’ debts and they (firms) default.

Because there are no organic returns from fuel use, customers must borrow.

There is a constant need for individuals to take on more debt; even as globalization has expanded the number of debtors it has not expanded their means. The world’s credit market is inundated with obligations that outweigh the ability of humans to retire them by way of labor. Reduced means = price declines. The elites cannot- or will not support a mass-market enterprise like oil consumption: they will lend some of their own (borrowed) funds to participating firms but refuse to squander a meaningful proportion of their wealth to simply buy and waste fuel. As the non-elites imitate their betters => price declines.

The economic arguments against inequality have narrow merit: the success of elites of grabbing more for themselves offers diminished returns. Non-elites’ obligation include servicing and retiring the elites’ debts, they do so by borrowing- and buying overpriced goods. From a wider viewpoint, elite success at pauperizing the bulk of the human race is a crude form of resource conservation. Greed undermines our consumption economy; this is a blessing in disguise! Pillage-to-breakdown gives our planetary life support system what small chance remains for it to do its job through the balance of the millennium … until we can learn to husband our capital wisely.

Retirement of loans requires productive activities that gain returns that can be applied against principal; productive activity is where ‘means’ are supposed to come from. The gargantuan amounts of debts today indicates there are really no productive activities at all, only borrowing platforms and (false) narratives. Debts are not retired with the output of industry but rather with new rounds of lending. Debts multiply exponentially as old debts drag from coffins like vampires-plus-interest. At the same time, new credit is always needed to fund the latest fashionable failing enterprises. Our dead-money debts are worthless claims against a rapidly diminishing capital account. Not just citizens but the world entire economy is insolvent: the oil price tells us that we can no longer borrow against the promise of future productivity … because there is no such thing.

Technology makes every sort of outlandish promise but is never able to simply pay its own way. Technology-related costs expand faster than returns, at the same time tech pushes aside forms that might serve to retire some of these costs: the voracious power demands of Internet data centers must be met with coal, Internet companies such as Amazon that perpetually lose money replace profitable ‘brick and mortar’ stores that provided the revenues which enabled the online firms’ rise in the first place.

The price for crude oil does not measure the worth of extraction but rather the worth of consumption … over the past six months there has been the downward repricing (depricing) of consumption by 35%. At the same time, reducing the price of inputs does not increase the solvency of the world’s bankrupts. A society cannot borrow- or consume its way to wealth. Only the careful husbandry of capital produces wealth. Industrialization is the strip mining of our capital and hunt for more. What propels the wasting process is the false promise that the mining process ‘creates’ capital rather than annihilating it.

Crude futures take another hit, (Bloomberg):

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 62.93 -2.91 -4.42% Jan 15
Crude Oil (Brent) USD/bbl. 66.10 -2.97 -4.30% Jan 15
RBOB Gasoline USd/gal. 170.40 -6.94 -3.91% Jan 15
NYMEX Natural Gas USD/MMBtu 3.62 -0.18 -4.81% Jan 15
NYMEX Heating Oil USd/gal. 205.09 -5.69 -2.70% Jan 15

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,204.30 +13.90 +1.17% Feb 15
Gold Spot USD/t oz. 1,202.67 +10.32 +0.87% N/A
COMEX Silver USD/t oz. 16.39 +0.13 +0.78% Mar 15
COMEX Copper USd/lb. 288.50 -1.75 -0.60% Mar 15
Platinum Spot USD/t oz. 1,233.25 +10.25 +0.84% N/A

Says Arthur Cutten:

Oil took a 4 percent hit, and concern is growing that this is a sign of slackness in aggregate demand, and not a over production move by the US and some of its allies to punish Russia, or the Saudis to give the shale oil crowd a stiff gut check on their long term viability.

The same folks who are needed to push up the price of crude are on food stamps, have lost 35% of their wealth in Japan, have ‘slowed’ in China; are mired in depression in southern Europe … and in northern, eastern and western Europe as well. Because a car cannot be paid for by driving the car, the world is ruined by way of its 1 billion cars.

Driving the car does not pay for the fuel, or the roads or any of the rest of the associated junk including the massive, intrusive governments that everyone loves to hate. What pays is hundreds of trillion$ of debt … that can never be retired.

The costs of housing, education, Obamacare, wars, infrastructure maintenance and entertainment (drugs) are borne by citizens who must borrow additional amounts to bid the price of petroleum products. The customers have reached their credit limits, as a consequence they are insolvent: customers must borrow to retire their own debts. Credit breakdowns caused by driller defaults will smash the customers even harder … the bid will shrink leading to more defaults in a vicious cycle: this is ‘Energy Deflation’, similar to Irving Fisher’s debt deflation model.

Energy Deflation is Underway Right Now.

The price will decline to the level where use (waste) of petroleum is deemed to offer a return. Because there are no returns, there is nowhere for oil prices to go but to decline. At the same time, no matter how low the nominal prices fall, they will always be a bit out of reach for the marginal customer. Ultimately, only the elites will be able to afford fuel, time will tell how much of a fuel supply- and use system elites can support.

By refusing to institute voluntary stringent conservation we are set to experience ‘Conservation by Other Means™’ less fuel use by way of war, national ruin, credit and currency crises.

Saudi Arabia has nothing to do with this as they are fully committed to high-priced crude to pay welfare to their millions of unemployable citizens. This is also true for the rest of OPEC. There is also no real excess supply of crude as the flow of fuel supplies is 6- or 7 million barrels per day below pre-2005 trends. This ongoing shortage does not cause price to increase, it reduces customer purchasing power, instead. This is what the economists miss: oil prices will test the 2009 low, there will be the tendency toward even lower prices.

Tighten your chin straps: the next phase of the Great Financial Crisis has begun.

Are You Confused Yet?

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on November 29, 2014


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You too can be a winner! (A loser!)

The recent and ongoing drop in oil prices is good for you! (There is a sense of edgy uncertainty that this may not be true.) With lower prices at the pump everyone can rush over to the nearest car dealer and purchase a new, gas-guzzling SUV or giant pickup truck … or fly the family to Disney World in Orlando! This is good for the economy, right? (No, it’s insane!)

We’re all consumers, right? (No, we all work for finance, we are paid whatever we can borrow.)

For the past six months there has been uncertainty (lies) regarding the causes- and effects of reduced prices and the petroleum industry. (Managers are loathe to admit it,) the trend is deflationary with prices being a consequence of above-ground factors that reduce the ability of petroleum consumers to pay … the number-one above ground factor being the high price of petroleum.

Analysts discuss the rousing success (challenges) of the petroleum supply industries; none of them discuss the (abject) failure of consumption as a business endeavor. Because consumption does not earn anything, all returns must be borrowed. The result is an economy dependent upon finance issuing exponentially expanding debt to fund new consumption as well as to retire- and service maturing legacy loans … in the amounts of hundreds of trillions of dollars.

Oil prices are declining because consumers are insolvent! They cannot borrow any more nor can their governments borrow more in their place. Without loans there is insufficient support for higher prices. This is true for all kinds of goods not just petroleum … as well as for credit itself!

The multiyear reflationary efforts on the part of the world’s central bankers (theft of the citizens’ savings) has been undone in a matter of a few days. The price of fuel is embedded in almost every good if only the shipping component. As the fuel price declines, so must asset prices. While the fuel itself cannot be the collateral for finance industry loans, the companies themselves and their properties certainly are. The last few weeks of plunging oil prices have crushed banks’ collateral holdings by 30% and more. Some form of retrenchment (margin call) is indicated … nothing good for the fuel extraction industry.

All the talk of ‘energy boom’ and ‘revolution’ have served only to make us complacent and ignore risks: underway is an oil shock but we do not recognize it. Unlike 1974 when there were gas lines, odd-even days and the hated ‘double-nickel’, the shock in 2014 takes the form of a credit crisis.

Figure 1: (chart by Euan Mearns with additions). When is a glut not a glut? Consider stock vs. flow: since 2005 conventional crude and condensate extraction has remained more or less flat. Increased output (flow) has come from expensive unconventional sources such as tar sands and ‘shale’ by way of fracking. Our recent, historically high prices are the result of diminished flow rates relative to consumption rate particularly within Asia. Customers there have been willing to pay more (globalization has given them access to Western credit markets).

At the same time, there is inventory buildup (stock) in North American terminals and elsewhere. Oil in the ground isn’t where it’s needed and the distribution infrastructure is insufficient to move it to potential customers. From the standpoint of flow, there is a shortage, from the standpoint of stock, there is a glut … the result of which is another cyclical bust that has tormented oil business in the past, (Byron King, Daily Reckoning):

American Association of Petroleum Geologists (AAPG) has about 30,000 members now, about half the number that it had back in the early 1980s. This is another way of saying that things were booming in the oil biz back then. But many people who worked in the geology business were laid off during the mid- to late-1980s and throughout the 1990s, due to what we look back and call the “oil bust.” From its high price of about $50 per barrel back in 1980 (using the dollars of that era, and it would be over $100 per barrel today in our inflated U.S. dollars), oil crashed in price to near $5 per barrel by the mid-1980s, a 90% fall in price.

The difference between eras: the increased flows in the past were due to new production from Alaska and the North Sea. There were also left-over conservation efforts in the West; China was communist and backward, the developing world was not a significant oil consumer. There was a large inventory build along with increased relative flows. Fast-forward to the present, there are sub-mediocre flows against ballooning worldwide demand and the black-swannish consequences of excess leverage needed to obtain any flows at all.

How high is too high? A lot lower than you think.

Citizens expect oil shocks to be accompanied by very high prices but this can be misleading. The rationing mechanism works identically at high- or low prices. During 2008, prices skyrocketed to a record $147/barrel, consumption fell because customers refused to pay the high price. A few months later price of oil had fallen to $34; another inventory-driven bust.

When customers are broke, even low prices will ration consumption … prices will decline to lower levels. The assumption is that at some (low) price consumption offers an organic return, once the oil price declines sufficiently oil consumption will begin to pay for itself and the economy will return to growth. This assumption is foundationally incorrect: consumption is purely waste, it offers zero return. What matters is credit availability and cost. With world credit leveraged to the solvency of fly-by-night energy companies the availability of credit becomes more and more … iffy.

Economists assume consumption will increase to the upper bound created by available supply … yet this is clearly not so. The upper bound is available credit rather than available fuel. Economists assume there is unlimited credit because interest rates are low, which implies pent-up demand. In reality, low interest rates are the product of central bank bond-buying and rate manipulation. At the finance level there are billions available to firms in the international credit markets, at the same time, customers are unable- or they sensibly refuse to borrow. Within the credit marketplace, customers compete vs. energy companies for funds. At the same time, the amounts the companies must borrow in order to extract fuel, must be borrowed by the customers in their turn to retire the drillers’ loans … plus interest. Drillers can only succeed by ‘out-borrowing’ their customers: the consequence of success is catastrophic! The customers are broke: when companies are unable to lay off their exposure onto their customers, the companies collapse.

Customers can only out-borrow the companies for a little while, they exhaust their own credit along with the resource which increases the funding burden of the companies. Invariably, the customers bankrupt themselves by cannibalizing their capital; this is the fundamental nature of the extract-to-consume regime … that economists don’t seem to grasp.

Energy Commodity Futures

Commodity Units Price Change % Change Contract
Crude Oil (WTI) USD/bbl. 69.31 -4.38 -5.94% Jan 15
Crude Oil (Brent) USD/bbl. 73.17 +0.59 +0.81% Jan 15
RBOB Gasoline USd/gal. 192.12 -11.39 -5.60% Dec 14
NYMEX Natural Gas USD/MMBtu 4.24 -0.11 -2.62% Jan 15
NYMEX Heating Oil USd/gal. 229.32 -10.33 -4.31% Dec 14

Precious and Industrial Metals

Commodity Units Price Change % Change Contract
COMEX Gold USD/t oz. 1,185.70 -11.80 -0.99% Feb 15
Gold Spot USD/t oz. 1,187.71 -4.96 -0.42% N/A
COMEX Silver USD/t oz. 16.14 -0.47 -2.84% Mar 15
COMEX Copper USd/lb. 289.30 -6.35 -2.15% Mar 15
Platinum Spot USD/t oz. 1,214.38 -3.62 -0.30% N/A

Analysts suggest with a straight face that conventional oil producers such as Saudi Arabia (and Iran) are now engaging in a ‘price war’ vs. the marginal barrel producers in North America. This is part of the narrative that denies the possibility of an energy shortage, (Telegraph):

World on brink of oil price war as OPEC set to keep pumpingAndrew CritchlowSaudi oil minister suggests Opec oil cartel would keep its production ceiling at 30m barrels per daySome Opec members want producers outside the cartel to shoulder some of the responsibility for balancing the oil market by essentially cutting their output.Crude traded in the US fell to as low as $74 per barrel $69 as traders bet that Opec will allow the price to fall further amid growing signs of a global price war amid producers.“There remains little prospect of any production cut being agreed at [Thursday’s] Opec meeting,” said brokers at Commerzbank. “Opec will merely agree to comply better with the current production target of 30m bpd.

Price war sounds sexy but it is misleading. Nobody in the energy business wants lower prices as diminished output losses cannot be made up with volume. As it is, every energy company is bringing every possible barrel to market …

Figure 2: Saudi oil ‘production’ since 1973, (Oil, source data by EIA). The Saudis have not increased their output so they have not affected the price. It would be more accurate to accuse shale- and tar sands companies for starting a price war against themselves. Oil analysts can look to the shale gas industry, (Deborah Rogers):

Shale and Wall Street: Was the Decline in Natural Gas Prices Orchestrated? – The price of natural gas has been driven down largely due to severe overproduction in meeting financial analysts’ targets of production growth for share appreciation coupled and exacerbated by imprudent leverage and thus a concomitant need to produce to meet debt service.– Due to extreme levels of debt, stated proved undeveloped reserves (PUDs) may not have been in compliance with SEC rules at some shale companies because of the threat of collateral default for those operators.– Industry is demonstrating reticence to engage in further shale investment, abandoning pipeline projects, IPOs and joint venture projects in spite of public rhetoric proclaiming shales to be a panacea for U.S. energy policy.– Exportation is being pursued for the differential between the domestic and international prices in an effort to shore up ailing balance sheets invested in shale assets.

As with the gas industry, overproduction is relative: unconventional natural gas plays are landlocked, the wells deplete before pipeline distribution networks to new consumers can be installed. Increased gas (stock) fed into legacy distribution systems = crashing natural gas prices. North America’s shale- and syncrude companies’ reserves are landlocked and dependent upon costly railroad distribution to terminals and refineries rather than pipelines.

Inaccessible supply and higher transport costs = discounted well-head price = reduced cash flow. This has left drillers dependent upon Wall Street junk bond financing and increased debt which in turn requires companies to misstate reserves.

As with natural gas, the Ponzi-incentives are for companies to flip acreage in the US and elsewhere. Finance offers more returns than actual physical output. Meanwhile, the debt- straitened companies look to Washington for permission to export (a bailout).

The price war argument is nonsense. Saudi Aramco has been selling 9 million barrels per day @ $108/barrel earning (borrowing) almost a billion dollars per day. At today’s price the same barrels earn roughly $650 million @ $78/barrel. The reduction in revenue implies the Saudis have put onto the market an additional 3 million barrels per day … if they could actually increase output by that much. Otherwise, the Saudis stand to lose hundreds of millions of dollars per day.

Conversely, producers would need to cut production by 3 million barrels in order to push the price back to $105/barrel. This would make sense only if there is an actual excess of supply. Instead, an output cut of that magnitude would cause a shift from an implied shortage (diminished flow relative to consumption) to an actual, physical shortage. So far, the implied shortage has affected customers’ ability to borrow. Further diminishing supply would the crash credit system altogether, this would certainly impact drillers including Saudi Arabia, which is just as dependent upon credit as any driller in the Bakken.

Less credit => less consumption => more of a ‘glut’ => lower prices => less output => less (high-yield) credit for drillers in a vicious cycle.

The claims of energy independence have served to obscure the price signal. Fuel constraints are evidenced by +$100 per barrel prices. Our grim- and nasty ‘auto-habitat’ has been built assuming sub-$20 per barrel into infinity and beyond, any price above that is too high. At the same time: sub- $20 per barrel petroleum = bankruptcy of the entire petroleum industry … along with finance which makes use of petroleum ‘assets’ as collateral.

What is underway is ‘Conservation by Other Means™’. Customers are rendered insolvent faster than lower prices can bail them out … which renders the current state of affairs resistant to management efforts. Central banks cannot reduce the physical costs of drilling even as they manipulate interest rate cost. Subsidies attempt to shift costs from drillers to their already insolvent customers. ‘Marginal Man’ — who sets the falling price for the rest — can be anyone in the world, not necessarily an American; he can be an (ex)motorist in Japan, or a busted tycoon in China.

Any bailout is a temporary reprieve. Accelerating the rate of consumption is stupidly counterproductive; customers are simply ruined, faster. Tepid attempts at mandated conservation will fail from the start: mandated efforts will compound those driven by events. Managers are chasing their tails: the pet theory that at some very-low price, consumption will offer a return. There is no such price! Consumption offers nothing at all but waste.

Conservation mandates only work at levels of consumption far lower than current rates; Euan Mearns’ missing 7 million barrels per day. The alternative solution is to find those missing barrels … too bad, they have already been burned up for fun. The barrels themselves are a moving target as depletion never quits! After 7 million come 8 million … 10 million then 20. We humans needed to make significant program changes starting in the early 1970s but we surrendered to liars and gamblers. Just because we refuse to recognize our oil shock for what it is does not mean it isn’t real.

I wonder how many people will scratch their heads as they’re filling up their tanks this week and wonder how much of a mixed blessing that cheap gas is. They should. They should ask themselves how and why and how much the plummeting gas price is a reflection of the real state of the global economy, and what that says about their futures.— Raúl Ilargi Meijer

Future = less.

Prediction Gap

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on August 9, 2014

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There are people who read this blog religiously, eager to find out when the next giant crash is going to occur. Blogman sez the giant crash is occurring right now under everyone’s nose. It just doesn’t look like a crash, rather more like a bit of vaudeville grafted onto a horror movie.

Bloggers, economists and finance analysts gain credit from their peers by predicting crashes and for no other reason. A good crash prediction allows financiers to shift away from potentially illiquid asset markets before they freeze up … so they might re-enter the same markets later when it is safe to do so. Prior to the Lehman collapse, about fifty high-level analysts fingered the last giant crash out of 6.2 billion humanoids on this planet (none of those other billions really cared). Estimable Gary Karz, CFA has taken the time to curate a comprehensive list of them. Included are familiar names like Dean Baker, Richard Baker, Roy Barnes, Susan Bies, Rick Bookstaber, Claudio Borio, Brooksley Born, Jesse Colombo, Vox Day, Richard Duncan, Marc Faber, Fred Foldvary, Robert Gnaizda, Wynne Godley, James Grant, Jeremy Grantham, Jeffrey Gundlach, Fred Harrison, Kenneth Heebner, Michael Hudson, Eric Janszen, Med Jones, Steve Keen … etc.

Where are these guys now? Some analysts like James Grant and Robert Prechter have been calling for a crash every week for the past twenty five years, but others are vague or they demur. In the foreground, the media circus trumpets ‘recovery’ and growth. In the background, nothing in the West’s finance- or energy throughput systems has been fixed or even amended since the beginning of the millennium and the ‘Dot-Com Crash’. Credit overstretch is greater now than in 2007, there are hundreds of trillions of dollars of derivatives cluttering the finance industry’s books, the too-big-too-fail banks are more bulbous and corrupt than ever … The same banks’ low-cost credit has inflated asset prices far beyond their underlying, fundamental worthlessness. The fuel for a giant crash is in place, all that is needed is a match. Everywhere in the world the economies are staggering; Japan, Russia, India, Brazil … even manufacturing powerhouse China is on the ropes.

When the slide passes the point where it cannot be ignored any more, people will cry, “nobody could have seen it coming!”

To a large degree, nobody will. Because the establishment adapts to crashes over time, each new one takes a slightly different form. The toolkit to combat money panics has been expanded and refined: bank depositors are possessed of almost universal government treasury-backed guarantees. Central banks offer cheap credit by the trainload which validates the worth of collateral taken in exchange for it. Risk-averse, under-capitalized retail speculators that were quick to leap head first out of windows have been driven out of markets; their places occupied by professionally-managed funds which have in turn been consolidated into behemoths. The monolithic firms tend to be panic- resistant because they are able to hedge themselves across multiple markets and have access to liquid credit at near-zero cost. At the first sign of trouble political establishments around the world rush in to ‘prop up’ key institutions with bailouts. Markets and banks certainly aren’t risk-proof but the finance system is more able to respond to a margin call more effectively than could markets twenty or thirty years ago.

The current crash has unrelated, non-financial components falling apart at distant margins: the un-crash crash. Emergencies pop up then disappear as soon as the mediasphere changes focus or is distracted by something else: Argentina defaults (again), Russia, Israel, Iraq and Libya engulf themselves or their neighbors with mad war, methane bubbles out of the ground in Siberia … returns on CAPEX in the oil patch decline … the air leaks out of bonds …

Figure 1: Back in 2012 the gnomes at Economic Undertow predicted that there would be ‘trouble’ sometime right about now … How it works is simple: at some ‘high crude price’, the economy seizes up; an ‘oil shock’ as in 1973. Conventional analysis assumes that the economy-killing price will trend higher with inflation and the passage of time: $147 crude in 2008 is followed by $200 crude then the $300 crude. This is a false assumption: observations since 2008 indicate that the economy-killing high price has declined and is now a little more than a $110/barrel for Brent crude. As extraction costs increase, the price that shocks the economy is lower than the price needed by the energy industry to bring new crude oil to the marketplace. The result is a shortage of fuel …

The incipient fuel shortage is manifest as credit ‘problems’, runs out of bonds, wars, social disturbances; things other than gas lines and ration coupons.

Before 1998, each succeeding dollar spent on fuel extraction accessed an increased amount of petroleum, much of this petroleum was simply left alone as spare capacity. From 1999 onward, every dollar spent has accessed diminished amounts of petroleum … with no end to this trend in sight. At the same time, demand for fuels has exploded with the addition of millions of Chinese, Indian and the Middle Eastern consumers … something has to give.

Three things are occurring simultaneously:

– oil prices are too high — regardless of what that price is. Even if prices aren’t high enough to cause an outright crackup as such, their effect is to slow the economy to a crawl. Our economic infrastructure has been built assuming sub-$20/barrel crude oil into the foreseeable future. Current $100+/barrel prices are unaffordable, our consumption infrastructure is stranded.

– Customers are less solvent and are less able to borrow due to the high cost of both fuel and debt. This means there are less funds available, fuel prices cannot be bid higher.

– The result is insufficient funds for oil drillers whose need for funds increases with time and whose costs can only be met with borrowing, (from, ‘The Mother of All Free Lunches’)

The maximum price customers can afford to pay for fuel decreases while the price required to bring crude to market continuously increases. The current price at any given time is too high, firms fail and customers are left with diminished discretionary income. At the same time, the current price is too low to allow drillers to complete the increasing numbers of wells in difficult areas that are needed to keep pace with demand- plus depletion in older wells.High prices strand consumption infrastructure. Low prices strand the drillers … When prices are ‘low’, the high priced reserves become unavailable. At some near point in the future both the too high- and the too low prices will be the same … then it’s game over. From the chart it looks to be about two years in the future … all else being the same. If conditions change, the price will plunge and oil shortages intensify. Under no possible circumstance will our pauperizing meat-grinder-economy be able to afford higher real costs: resource waste is unproductive everywhere but at the margins, so is the debt taken on to subsidize it

The proposition is that more loans can command capital to appear: analysts assume that changes in the rules governing finance can change conditions on- and under the ground. Central banks offer loans used to gain capital but they cannot offer capital itself, which requires work to extract and make usable. Additional work is required due to the ‘destroyed capital’ effect and continually diminished capital concentrations.



The fifty- or so prognosticators peering forward in 2007 thereabouts were looking through the prism of mortgage debt. Post crisis, the mortgage origination and funding regimes have been cleared; the housing speculator ‘weak hands’ sent into bankruptcy. Today’s debt related risks are spread out across a constellation of regimes that also happen to be subprime: auto loans, college education loans, stock buy-back funding, M&A, IPO/angel funding, also energy lending. Analysts today looking to predict must look through the telescope of energy cost. Energy firms are able to fund themselves because of the central banks’ concerted efforts to keep interest rates below the rate of inflation. Firms must fund themselves because their customers cannot afford to do so; that being the definition of ‘sustainability’ … when customers borrow in the place of the businesses they are buying from, putting themselves on the hook for repayment rather than the firms.
fredgraph EFFR
Figure 2: US Effective Federal Funds Rate by FRED, (Click on for big). The modest rise of interest rates beginning in 2004 was the proximate cause of the mortgage crisis; the reason behind the increase was the marketplace response to ‘inflation’, that is, rising fuel prices due to vanished spare capacity. After the crisis began, rates plunged to current levels: some of this credit flowed toward the finance industry itself and its pyramid schemes, much of the rest is flowing now to the energy extraction industry.

The International Energy Agency estimates that $48 trillion will be needed over the next twenty years to procure the modern world’s needed energy, a doomsday machine in all but name. Approximately half of the $48 billion will be required by the petroleum industry. Keep in mind, these fuel industry’s costs are ultimately the responsibility of customers to retire … assuming that individuals will be able to borrow these amounts … which are themselves likely to be an underestimation.

If the world’s GDP remains the same at roughly $60+ trillions per year, the IEA percentage appears modest; however, GDP cannot be assured any more than the cost estimates. Procurement amounts to a modest fraction of total energy- or even petroleum budgets. When fuel shortages actually materialize the GDP numbers will decline while the amounts directed by necessity toward the fuel industry will increase. As the industry attempts to compensate for legacy depletion it drills more wells, the new wells deplete along with the others. The result is an industry race against itself as accelerated extraction pressure draws down reservoirs that much faster …

Fast forward to the onrushing crisis under our feet: credit is stressed, customers are broke and cannot pay. Fuel prices are declining because there is less credit. Drillers are dependent upon Wall Street finance and central bank interest rate policy even though the finance is drying up and rates are set to rise regardless of what the central banks do. Everyone is running as fast as possible trying to catch up to themselves … and finding themselves always a little out of reach.

A personal note:

My friend Jim Hansen announced the other day that he is ceasing publication of his excellent newsletter ‘Master Resource Report’. Says Jim:

Since 2006 nearly 400 issues of The Master Resource Report have been distributed as a free educational service of our firm. The motivation was to share some of our insight with a broader group of interested people so they could make better informed decisions in their lives concerning energy. But now it is time to end this venture due to a combination of time constraints and other demands for my attention. In closing out the report I would like to leave a few observations concerning what history might tell us about what may be ahead.The first observation is that we have been here before with forecasts of oil abundance and lower prices on the horizon. While it is frequently pointed out that we have not run out of oil as if that is what Peak oil is about. The abundance side of the debate is seldom given the same critique.

Over the last 15 years there have been as many calls for cheap and abundant oil as there have been for scarce and expensive. But one reality holds, the inflation adjust price of oil today remains near an all-time high while the global economy remains sluggish and crude oil production flat lines. On this point always remember to check and see what is being represented as oil. When the term liquids is used it is a tip off that everything from NGLs, biofuels and the absolutely useless refinery gains are probably in the volume mix being quoted.

Energy is The Master Resource required to extract all others. Without the cheap transportation fuels provided by oil the global economy as we know it today would not exist. The food supply depends not only on the diesel fuel for farms and transport but the fertilizers and chemical inputs that oil and natural gas have provided the “Green Revolution”.

I hope that by making these points through this report I have given readers some perspective to plan both their lifestyle and investments. The risks we face are great but so are the opportunities. How it works out for all of us depends on how we choose to use or not use the information we have.

Best Wishes to All and thanks for all your feedback over the years.

It’s understandable that Jim would bring an end to his long-running project. After awhile behind the computer you forget your family members’ names or what they look like. I sent him an email suggesting that if he ever feels the need to write a commentary to feel to send it over this way. Thanks, Jim, for the timely intelligence!


Off the keyboard of Steve from Virginia

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Published on Economic Undertow on May 10, 2014

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Triangle of Doom 050114

Figure 1: Funnel of Doom (by TFC Charts, click on for big): As we near the end of the auto age we twist in agony, first one way, then the other to avoid our fate, which is to walk everywhere we need to go. Problems are emerging everywhere, not simply car-dependent US and EU; Russia attempts to rattle the saber so as to force fuel prices higher. The outcome: Russia’s foreign exchange collateral flees the country, (Ambrose Evans-Pritchard):

The European Central Bank says capital flight from Russia since the Ukraine crisis erupted may be four times higher than admitted by the Kremlin, a clear sign that sanctions pressure is inflicting serious damage on the Russian economy.Mario Draghi, the ECB’s president, said the outflows from Russia have been large enough over recent weeks to push up the euro exchange rate, complicating monetary policy for the ECB.“We had very significant outflows that have been estimated by some to be in the order of €160bn out of Russia,” he said, without specifying where the information came from.This is equivalent to $222bn. It is the highest figure suggested so far by a senior official with access to confidential data. The Russian finance ministry said outflows had been just $51bn in the first quarter, though the total has almost certainly risen since then.“Draghi’s figure is a huge amount. If this is correct, it shows that Russia is in much more trouble than people think,” said Tim Ash, from Standard Bank. “This is the same scale of outflows we saw in late 2008 after the Lehman crisis.”

Russia needs higher prices so that its oil extraction industry can meet its skyrocketing costs. Putin, like the rest of us, has reached the neck-line of the Triangle of Doom, the pointy-end of the gangplank where there is negligible room to maneuver, where the conventional solutions — such as threats of war to inflate the oil prices — don’t work any more.

There is almost nothing Putin can actually do: he certainly cannot escape the triangle. He dares not risk a conflict with Europe as that would entail Europeans deciding to do without Russian petroleum and gas; this would cause prices to drop, the opposite of what Putin intends. He also dares not risk an outright war with Ukraine that Russia might is certain to lose. He dares not risk a credit embargo, although the market voting with its feet amounts to the same thing. Putin pretends … he cannot control his own destiny.

He cannot afford to build a larger, more threatening army, nor could he use one if he had it. Russia would have to borrow more from London and Frankfurt. Armies like cars are non-remunerative. Anything Putin could gain in a war would be worth less that what his army would cost!

Despite the whoopla and armored brigades, the crude price is holding steady. The best evidence of the oil peak is the inability of the threat of wars in an oil producing- regions to inflate the price. It means the customers cannot borrow any more; they are broke. Under the circumstances, something has to give, if the oil price cannot jump (w/ more funds proportionately flowing to Russian energy companies), the ability of ordinary Russians to buy fuel with roubles must plummet. This is underway right now: Russia’s national account is deleveraging, foreign currency collateral is flying out of the country as fast as Russians can get their hands (computers) on it. To some degree, Russia = Cyprus.

A reason for the flight of funds out of Russia and the other BRICs is the fact of their dependence upon overseas loans in the first place. Countries like Russia and China are desperate to industrialize, to ‘get rich quick’ and damn the consequences. Managers never look to see whether industrialization is appropriate or even possible in their countries, they improvise using whatever comes to hand, relying on funds borrowed from overseas. These outside creditors are both capricious and untouchable; they act with impunity, lending- or withholding funds as the spirit moves them, when there is a better deal elsewhere or after they have assembled short positions in the borrowers’ assets. There is nothing the borrowers can do to control the lenders or protect themselves from the unpleasant consequences when the credit tides turn.

Because there is shrinking (forex) collateral relative to claims against it the Russian rouble is underwater. Like a bank in the midst of a run, the Russians won’t stand aside and watch foreign exchange fly out the window leaving the rouble effectively worthless. Interest rates in Russia will jump. If this doesn’t work there will be capital controls, effectively ‘closing the bank’ … but also cutting off Russian domestic credit — and Putin’s nose to spite his face.

Russia Sector Credit Flows

Figure 2: The Russian economy and finance is basically a money-laundering scheme that directs the returns from energy sales to tycoons. Funds flow from EU and UK banks by way of fuel customers to Gazprom and the Bank of Russia. Some funds are held as currency reserves, the rest flow to tycoons’ overseas accounts where they are used to purchase luxury real estate, yachts, artworks, gold and other easily exchangeable goods … The Bank of Russia uses overseas currency as collateral for rouble loans, refunding the roubles to commercial banks, thence into the Russian economy. See ‘Debtonomics; Currency Crisis’ for an explanation of how the process works.

Russia lacks the ability to produce needed organic credit, it lacks infrastructure including strong banks, a freely tradeable currency, goodwill and the rule of law; instead there are weak banks, a rouble that circulates little outside of Russia, absence of trust and arbitrary rule by Putin. Because Russian credit is no good the country requires overseas loans from European lenders acting indirectly through Russia’s energy customers.

Industrial modernity requires a credit subsidy to function. A constant flow of new funds into Russia from overseas is necessary as the leakage to tycoon safe-havens is a collateral drain with an accompanying reduction in rouble purchasing power. If Russia holds onto its collateral the tycoons are starved of funds. The alternative is for the Bank of Russia to make unsecured loans to its commercial bank clients in an attempt to ‘make good purchasing power losses with volume’. The outcome is there is no lender of last resort and bank runs … which are underway right now.

Unsecured rouble lending by Bank of Russia is indicated by red-outlined arrow. Weak Russian banks are unable to distribute their own losses into the Russian economy, attempts to force such losses results is a vicious cycle- black market currency arbitrage leading to hyperinflation as in Argentina, Venezuela, Belarus, Iran and previously in Russia, itself. Citizens and speculators use whatever local currency they can get their hands on to ‘purchase’ the desired hard currency heedless of the affect on the exchange/inflation rate as indicated by the black-outlined arrow.

The ground rules are changing under the Russians’ feet; it is possible their foolishness will by itself trigger the exact crisis they are desperate to avoid. Events that signal major economic turning points can be hard to identify as they occur; the background accompaniment tends to be rising borrowing costs that are added to already-bankrupting fuel costs.
Oil Price Volume 050814(1)
Figure 3: Chart by ‘Political Economist’ by way of Ron Patterson’s ‘Peak Oil Barrel’, (Click on for big). A record of cumulative crude- and condensate (C&C) since 1965 with prices in constant 2012 dollars (from BP Statistical Review).

Notice that the bulk of C&C extraction cost less than US$40 per barrel; prior to 1973, the inflation adjusted cost was less than US$20.

Back of the envelope calculations give the following quantities at different price levels:

  • Less than $40/barrel (2012 dollars) = 73,175 million metric tons since 1965.
  • Less than $60/barrel (more than $41) = 23,050 million metric tons. It’s likely that oil in the sub-$60/barrel price categories has been completely exhausted, all that remains is petroleum and near- petroleum substances that are more costly to extract.
  • Less than $80/barrel (more than $61) = 20,200 million metric tons.
  • Less than $100/barrel (more than $81) = 35,300 million tons. roughly 12,000 million MT of this crude was extracted during the period of Middle East wars that occurred during the 1970s and early 1980s.

Without the wars and their affect on transport, it is likely that crude price would have remained $40/barrel or less ($16/barrel in 1972); there was no shortage of petroleum in the ground and demand was inelastic. Higher rates of consumption at lower prices would have brought forward the onset of depletion-related difficulties that we are facing now. Critics of Hubbert linearization point out that it does not adjust for changes in oilfield technology. It also cannot adjust for above-ground interruptions in the consumption regime: the various Middle East conflicts in the seventies and eighties put off the world oil extraction peak by about ten years.

The question mark in figure 3 represents what crude are we going to use going forward? Peak oil analysts insist that the production plateau does not mean ‘running out of oil’. It is hard to see it meaning anything else when the only petroleum our economy can afford has already been burned up.

The suggestion that similar amounts of fuel will be available after extraction peak as before is not borne out by cost/volume analysis. The lower-priced, sub- $60/barrel fuels have been exhausted; lower price made fuel a loss-leader for the burgeoning automobile industry; the consequence of low prices was a world filled with cars and accelerating rates of depletion. Lower costs reflected the ready accessibility of pre-2000 crudes: volumes were easy to extract from large, conventional onshore- or shallow-water offshore formations. Going ‘up’ the extraction rate curve was affordable with relatively little credit being required, the external costs were easily pushed into the future.

The fuels we have today are not the same fuels we used to build out our consumption infrastructure. We have cleverly trapped ourselves: we must support higher prices because there are no low-priced fuels available. At the same time, our waste-infrastructure does not offer returns that would support the higher prices! We either bankrupt ourselves with loans from criminals to support our lifestyles or learn to do without.


Crude oil prices 1861-2012


Figure 4: oil price chart from BP. Nominal prices from the end of the 19th century to 1973 were less than $10/barrel; from the 1978-82 period to the late 1990s the nominal crude price did not reach US$40/barrel. Nominal wages during this period were also very low. Fast forward to the present; wages have been stagnant since the late-1990s while cost of fuel has jumped in both nominal and real terms by over 500%.

What is emerging from background noise is current business practices offer the prospect of geometrically expanded costs for credit and fuel access … without end. Automobile waste was a losing proposition at $15 per barrel, genius is not required to imagine how poisonous $95 per barrel is to the same enterprise. Our economy does not meet its ordinary expenses by way of cash flow, we are insolvent. We are able to ‘fake it’ for a little while; this is because finance is willing to lend … until we are undone by the absence of real returns and our refusal to face reality.
Gas Buddy 042914
Figure 5: Enter American Dream- killing four dollar gasoline; the heat map from (Click on for big.) Fuel industry costs emerge in wealthy California where residents are better able to stump up for fuel; in lesser parts of the world, folks address the structural fuel constraints by not buying.

Californians create the constraints the same time they battle its effects by destroying every bit of gasoline they buy! They are trapped like the Russians. If they continue to drive they push the cost of gasoline to the level where demand is ‘effected’ and the price cannot be met, where consumers begin to vanish. At the same time, Californians cannot afford to stop driving, they have invested too much in the process. Aside from speculating in real estate, the entire economy of the state — as well as the rest of the developed world — revolves around buying and using cars for everything.
Vehicle Miles Traveled 042914
Figure 6: Vehicle Miles Traveled by way of the St. Louis Fed: Americans by right should be driving 3.6 trillion miles this year but are stuck in reverse. Sadly, less driving has little effect on the fuel price, there needs to be far less driving and less fuel waste, this would reduce prices further but would bankrupt oil drillers at the same time.

China finds itself perched at the end of the same triangular gangplank as the Russians, (New York Times):

China Flexes Its Muscles in Dispute With VietnamJane Perlez and Rick GladstoneBEIJING — China’s escalating dispute with Vietnam over contested waters in the South China Sea sent new shudders through Asia on Thursday as China demanded the withdrawal of Vietnamese ships near a giant Chinese drilling rig and for the first time acknowledged its vessels had blasted the Vietnamese flotilla with water cannons in recent days.While China characterized the use of water cannons as a form of restraint, it punctuated the increasingly muscular stance by the Chinese toward a growing number of Asian neighbors who fear they are vulnerable to bullying by China and its increasingly powerful military. The latest back-and-forth in the dispute with Vietnam — the most serious in the South China Sea in years — sent the Vietnamese stock market plunging on Thursday and elicited concern from a top American diplomat who was visiting Hanoi.Political and economic historians said the China-Vietnam tensions signaled a hardening position by the Chinese over what they regard as their “core interest” in claiming sovereignty over a vastly widened swath of coastal waters that stretch from the Philippines and Indonesia north to Japan. In Chinese parlance, they say, “core interest” means there is no room for compromise.

Chinese saber rattling is no different from the Russians. The desire is to reflate the economy and push prices higher, to forestall deflation or ship it overseas to its trading partners. This endeavor is certain to fail, like Russia viz Ukraine, China dares not risk a war with violent and militaristic Vietnam which has been the graveyard of Chinese ambitions for centuries.

Like Russia, China is dependent upon Western (dollar) credit. Collateral for China credit and its currency (RMB) is trillions of US dollars, euros, yen and sterling. When overseas credit flows out of China, RMB purchasing power evaporates. Unlike Russia, China has strong banks, tens of trillions of bank system losses have been distributed into the Chinese economy in the form of worthless infrastructure, all that remains is for the extent of these losses to be revealed as the credit tides flow out.

China is dependent upon the solvency of its biggest customer and credit provider, the US. As the Land of the Free becomes the Land of Out of Reach, so does China at a remove. China also goes broke for reasons its own. One is the government’s ‘Tapering Error’; it must reduce the flow of RMB credit and face the inevitable consequences. The alternative course is to continue with credit expansion which offers sharply diminished returns. Credit shrinkage will remove a large part of World fuel- resource demand along with support for petroleum drillers.

China is overdue for an ordinary inventory-driven business-cycle recession, not having experienced such a slowdown since the country began to modernize during the mid-1980s. China also faces what Richard Koo calls a ‘balance sheet recession’. China’s finance losses overhang the economy, these reside uneasily as ‘assets’ on China’s ledgers. Deleveraging reveals assets as worthless, which causes further deleveraging which in turn reveals more losses in a vicious cycle. China has little in the way of effective tools to manage this sort of thing: it is at the end of a long regime of very easy credit. Since 2008, there has been a ‘money dump’ by SOE (state-owned enterprise) banks and shadow- ‘loan shark’ banks. Once enough foreign exchange collateral flees there is likely no more easy credit to be had. China’s currency will be underwater, essentially worthless.

The land of 1.2 billion faces an agricultural emergency. As much as seventy-percent of China’s land and water contaminated with metals and mining waste, toxic chemicals and fertilizers; pesticides, sewage runoff and pharmaceuticals, fuel, smog components, soot and radionuclides (mostly from coal burning). This leaves out agricultural land and watershed areas surrendered to urbanization, desertification plus the over-draw from aquifers. This takes place within the context of global warming, driven to a large degree by aggressive Chinese industrialization and massive fossil fuel waste.

China is also subject to dollar-preference, the desire to hold dollars because of what can be obtained with them relative to what can be had with other currencies or by way of barter; the eagerness of locals to trade local currencies to gain dollars at any price; the ‘currency war’.

Russia claims it can offset losses in the West with trade gains from China. This is nonsense; Russian managers don’t understand that China is just as dependent upon Western credit and flows of funds as Russia, itself.

Our fuel system exists to support the automobile industry and all its dependencies. Take away the autos and there is a vanishingly small need for petroleum, the reverse is also true: take away or diminish the fuel system and the autos are stranded along with all the frivolous junk that has been put into service to rationalize universal auto use. None of these bits of junk pay for themselves; what is occurring in Russia and China and their trading partners is the necessary coming-to-grips with both credit- and resource limits. Malthus was right; machines multiply until the outstrip their supply of ‘food’; the outcome is catastrophe, coming to a freeway or strip mall near you.

Turning Points and Peak Customer

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on February 26, 2014


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Turning points come and go without notice, they are hard to pick out of the background noise, and are usually only recognized long after the fact and after much dispute. A good example is peak oil; did it really occur, if so when … ? Did it slip out of town under the cover of darkness in 2005 or in 2009; is such a thing even possible with the substitution effect; when higher retail prices invariably make new forms of energy available?

Figure 1: It certainly looks like a peak of the oil thingy from here: S&P 500 divided by Brent crude price from the FRED; the S&P is a proxy for the private sector, equity is its ‘money’. Crude oil has never been so affordable in post-WWII America as it was in 1998-99. This major turning point came and went and nobody bothered: no recession, no clowns or cocaine parties, no fireworks displays, wars or parades down Main Street; no billabongs, panda-bears or double-headers, just a change in the modern world’s way of living; a couple of years of ecstasy and super-low prices and then … gone.

The super-low prices represented the greatest number of humans across Planet Earth able to afford fuel: peak customer. Since that time, the pool of potential customers has been continually shrinking even as fuel production/consumption has remained steady. Carried to its logical conclusion, it would make sense that only tycoons would be able to afford fuel. Sadly this minuscule group’s grip on reality is made up of nothing but claims — empty promises. The so-called ‘great wealth’ of the tycoons is not able to support the colossal infrastructure needed to get tomorrow’s petroleum out of the ground. The industry cannot scale backwards, to run it needs energy that is cheaper than what it delivers … not promises; there are no inexpensive-to-deplete energy supplies remaining to scale back to.

The tycoons are just as stranded by the depletion of low-cost fuel as everyone else; they foolishly took on the world’s teeming billions in a pizza-eating contest and they won. Oorah! All too quickly the pizzas are gone, a Pyrrhic Pizza Victory for the tycoons.

Meanwhile, the bulk of the world’s citizens were unable to afford to buy into the fuel consumption regime even at the super-low price. Free barrels would have been too costly for those unable to afford the car needed to burn them. At this margin of desperation equilibrium economics simply falls apart: supply + demand = irrelevant.

Physical output does matter but scarcity affects price first. Less crude = higher price, the current price is suggestive of a shortage even when physical production appears to be increasing. Petroleum extraction does not exist out of context which is demand and consumption. Consumption always equals extraction so it is impossible to make a qualitative judgement of one relative to the other. Demand is an entirely different story: the change in the price per barrel represents the contest between potential users. It illuminates the relative merit of the winning bidder; price is a ‘stupidity indicator’ in that the highest- and best use of fuel is to keep it in the ground and not waste it. This is never the outcome: money is borrowed then spent in a frenzy, the fuel is gone so is the cash; the game is lost before it’s begun! Price never lies: the greater the amount of money spent on waste, the more foolish we are. Analysts dodge around price because it tells a story that people would rather not hear, that energy problems needed addressing fifteen- or more years ago and that industrial modernity has been living on death row ever since.

Rising prices ration customer access to fuel. No credit = no fuel. Using dollar price or a stock index to determine peak oil is sensible when these things are the means of fuel allocation. Measuring by price is no different from barrels-per-day. A dollar is a unit of measure just like a share of stock or an inch. Only when the credit rationing regime falls apart does output matter because rationing from that point forward is physical and immediate rather than intermediated by friendly bankers; there are gas lines, ration cards, travel restrictions, odd-even days, checkpoints, the hated ‘Double Nickel’. Also massive unemployment, the shortage of ‘real money’, black markets, collapse of automobile-related industries including real estate, finance, insurance and manufacturing.

First it was Bitcoin, now this …

A turning point appears to be underway on Wall Street; speculations are now so idiotic that even fools are dismayed, (Bloomberg):


Greed Turning Losers to Leaders in Russell 1000 IndexLu Wang

Unprofitable companies such as Zynga Inc. and FireEye Inc. are leading gains in the Russell 1000 Index.

Two things explain why the biggest gains in the U.S. stock market this year are coming from companies without profits, according to Jeff Mortimer of BNY Mellon Wealth Management: Greed, and fear of missing out.

Neither dooms the bull market, even as they signal to some investors a potential top after five years, said Mortimer, the Boston-based director of investment strategy for BNY Mellon Wealth Management, which oversees about $185 billion. More than $14 trillion has been added to American equity values since March 2009 and the Standard & Poor’s 500 Index is within 1 percent of a record.

Unprofitable companies such as Zynga Inc. and FireEye Inc are leading gains in the Russell 1000 Index. The Nasdaq Biotechnology Index is up 25 percent in the past 10 weeks, the most since February 2012, data compiled by Bloomberg show. Less than a third of its 122 companies earned any money in the last 12 months. Marijuana shares, which trade on venues with less stringent reporting requirements, are among the most active.

“In this backdrop of human emotions, which begins to take over, it’s one of greed, it’s one of willing to pay for something that will happen in the future and being afraid that one might be left behind,” Mortimer said by phone on Feb. 19. “It benefits the whole market. Whether or not they’re overpaying, only time will tell.”

Candy Crush

Investors are embracing riskier stocks after declines this month proved fleeting amid rising corporate earnings and improving economic data. Takeovers from Actavis Plc’s $25 billion bid last week to buy Forest Laboratories Inc. to Facebook Inc.’s $19 billion purchase of WhatsApp Inc. are fueling speculative bets as companies such as King Digital Entertainment Plc, the maker of the “Candy Crush Saga” game, sell shares for the first time.


The inflated prices for ‘nothing in particular’ have lost the power to outrage: the Return of the Dot-Com Fiasco is taking place right under everyone’s noses. The pot boils even as nicely-dressed very serious people in the media business watch carefully. Bloomberg provides a convenient list of companies to short: Zynga, Actavis PLC, Facebook, Fireye … the entire Nasdaq Biotechnology Index! Don’t forget Amazon, Twitter, Tesla and Hemp Inc. None of these companies earn money, nor do they produce anything of value … only distractions and the promise of endless free lunches some time in the indeterminate future. Ditto, General Motors, which has become a hedge fund favorite for the same reason as these other companies; because some wealthy escapee from a mental hospital is expected to pay more for it later! As with petroleum, the rising stock indexes taken together are a stupidity indicator.

America used to be a serious country but that was so long ago that it passes out of mind …
Screen Shot 2014-02-24 at 3.55.47 PM

Anyone looking to measure how far we have fallen down the rat hole need look no farther. This high-quality ‘adult’ product is worth billions to enterprising investment market villains who will ‘pump’ it and then ‘dump’ it on unsuspecting retail bag-holders and pension funds. Nobody in their right mind would have anything to do with it …


America descends into mental illness, meanwhile, endless propaganda from the energy industry insists on a natural gas glut in the US resulting from improvements in technology. Enter a winter in the US that is more or less ‘normal’ and natural gas in storage has fallen sharply. Our glut does not seem to be quite so glut-ty after all;


Working gas in underground storage, lower 48 states Summary text CSV JSN
Historical Comparisons
billion cubic feet (Bcf)
Year ago
5-Year average
Region 02/14/14 02/07/14 net change implied flow (Bcf) % change (Bcf) % change
East 685 814 -129 -129 1,119 -38.8 1,049 -34.7
West 229 259 -30 -30 369 -37.9 329 -30.4
Producing 529 620  R -91 -91 930 -43.1 806 -34.4
   Salt 77 109 -32 -32 226 -65.9 139 -44.6
   Nonsalt 452 510  R -58 -58 703 -35.7 667 -32.2
Total 1,443 1,693  R -250 -250 2,418 -40.3 2,184 -33.9
R=Revised. Resubmissions of data resulted in increasing estimates of working gas stocks in the Producing Nonsalt region by approximately 7 Bcf for the week ending February 07, 2014. The reported revision caused the stocks for February 07, 2014 to change from 1,686 Bcf to 1,693 Bcf.


Table from EIA; The red figures at the bottom of the chart tell the story as gas is withdrawn from storage at a high rate. A year ago there was 2,418 billion cubic feet of natural gas in storage. Fast forward and approximately half has been drawn down. It seems America’s gas glut is less about ‘production’ and more a matter of successive mild winters with surpluses carried over year to year. In place of 100 years’ supply, there is an infrastructure bottleneck. Industry could expand storage- and distribution capacity, instead it races to build LNG export terminals whose massive costs are certain to be added to the gas price. It will be interesting when US customers wake up to find themselves competing dollar-for-dollar with Japan and China for American natural gas …

Turning points occur when folks realize they’ve been had …

Since oil peak in 1998, there has been widening turmoil across the world as governments fail to respond effectively to straitened credit flows and higher real fuel- and food prices. Citizens take to the streets and establishments fall apart. Latest country to emerge with a shiny, new power vacuum is Ukraine, which effectively jettisoned its pro-Moscow plutocrat Victor Yanukovych and his cadre of bullies and grifters. It is unclear what form the new Ukraine government will take, but one thing is certain: the country will be flat broke.

Looking at the failed governments and the countries that are on the edge of a regime change, ‘broke’ is the common factor along with the countries being energy deadbeats. Fuel is costly and using it does not offer a useful return, countries with little to trade must borrow, when they cannot they are insolvent:
Ukraine 2014-02-26
Figure 3: Tell-all chart from Mazama Science (click on for big); Ukraine has been on a stringent petroleum diet since the early 1990s even as loans outstanding have ballooned. In a way the country is a model for our post-petroleum world-to-come, having endured an almost 75% reduction in fuel consumption. Ironically, Ukraine is criss-crossed with petroleum- and natural gas pipelines that are the legacy of the old Soviet Union, carrying fuels from the Caspian- and Caucasus oil- and gas fields to Warsaw Pact states. Now these pipelines transport fuel from Siberia and Central Asian Republics to Western Europe. Geography has made Ukraine the gas transport route, there is little economic point to making changes. Routing pipelines through Belarus or elsewhere would consume both time and resources, the costs would exceed any possible gains.

Ukraine has had a contentious relationship with Russia regarding gas and credit since the collapse of the USSR. Over the interval Russia has taken to periodically cutting off Ukraine gas supplies causing shortages downstream in Europe. At the same time, Ukraine siphons gas from the pipeline network for its own purposes or for resale.

Ukraine has little in the way of domestic energy supplies and is dependent upon imports, mostly from Russia. The relationship between the two countries is like a marriage where the two parties hate each other but neither can afford to move. Ukraine is an exporter of agricultural commodities but these exports are insufficient to support fleets of automobiles and Western-style fuel waste. This leaves the country desperate for loans … with the various Ukrainian governments playing Europe against Russia in a contest alongside the one for natural gas.

Governments in Ukraine have been notably corrupt as is the case in other post-Soviet republics. Ukrainian politics is a rough trade where bosses are like Mafia dons, poisoning- and imprisoning each other on trumped up charges. Living alongside Russia, the country is subject to intrigues. A possible outcome is for the country to split into pro-Western and pro-Russian territories however, the need of one for the other and pipeline geography argues against this. The one Ukraine would not like to be held hostage to gas flows to-or-from the other Ukraine.

The Putin government in Russia does not appear capable of dealing with others except by way of bullying and threats of force. Measured against the vulnerable the Russians appear very powerful; girl bands, democratically inclined political opponents, Greenpeace activists, reporters and homosexuals. Against very small countries such as Georgia and Chechnya, Russia’s comic opera security forces have been relatively effective. Against Ukraine, the outlook is sketchier as the mostly unarmed but highly motivated citizens had little trouble keeping Ukraine’s military in their barracks while crushing the government’s elite internal security forces. This should give the Russian establishment pause as that country is as vulnerable to political upheaval as Ukraine whose citizens have now produced a practical guide in real time on how to conduct a successful street revolution.

It is too soon to tell how this will turn out but a turning point appears to be taking form; certainly toward long-overdue seriousness of purpose and away from elites’ impunity. The Ukrainian challenge is to find a way to isolate Russian provocateurs and troublemakers. The advantage lies with the Ukrainians: Russia cannot afford any act that cuts Gazprom from its European customers and their precious euros. This mitigates away from fracture, for Gazprom to deal with one Ukraine is bad enough, to have to deal with both an East- and West Ukraine would be unbearable. Russia is not a stable country, the strains there are already showing, already the rouble is unraveling, there is capital flight. To defend the currency after the inevitable Ukrainian default plus any level of conflict would pretty much destroy the country.

Instrumental to the Ukrainian citizens’ success so far is their vehement rejection of the tycoons and politicians’ self-interested culture of excess. The moral high ground has been gained by the ordinary Ukrainians, maybe for an instant only, certainly not everywhere at once. This is ground to which no tycoon anywhere can have any possible claim. The cynical Russians offer loans but with special favors for oligarchs. The equally cynical West offers hypocrisy and its own brand of TROIKA criminality. Ukrainians counter with a relentless insistence upon fairness and the end of corruption. Something is certain to come from this, honesty is dangerous to the tycoons on Wall Street and their bought-and-paid-for pets in Washington DC and the other world capitals as they look toward Kiev and tremble.

View From the Bottom of the Energy Barrel

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on February 1, 2014

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Anyone paying attention cannot be surprised by economic distress being felt around the globe … we are all reaching the neck of the funnel, the farthest corner of the box we have built for ourselves out of foolish contradictions and hoped-for perpetual motion machines. There are multiple ways out of the box but we cannot bring ourselves to turn around and step away, to turn loose of our toys that drag us off the edge toward oblivion. Instead, we press ever more tightly into the corner, hoping an escape hatch will materialize by magic.

Triangle of Doom 020114

Figure 1: The World-famous Triangle of Doom: continuous Brent Crude futures price up to the end of January, 2014, chart by Commodities Click on chart for big. The upper bound declines along with creditworthiness. The cost of fuel production increases due to geology and the increased difficulty in gaining fuel to replace that which we have wasted. $110 per barrel appears to be the new upper bound; as the Brent price neared that level a host of countries’ economies began to vomit.

The declining trend is what customers can afford to pay: the advancing trend is the crude oil price required by drillers to remain in business. Soon enough, the price required by drillers will be unaffordable, the outcome will be shortages as first the highest- cost supplies are shut in. Shortages will further affect customers who will purchase less fuel pressing on prices in a vicious cycle.

Our unhappy date with destiny can only be ahead of us as long as nothing important breaks and the managers avoid errors. Keep in mind, any shortages that occur because fuel is unaffordable … will be permanent. One cannot dig oneself out of a hole, having constrained fuel supplies does not make countries richer or more fuel available.

It is axiomatic when fuel prices are too high there are adverse economic consequences which cause prices to decline. Consequences have arrived it is reasonable to propose fuel prices are too high, they are set to decline. Prices have been high for a very long period, for the wealthy and ambitious, at least ten years. Organic economic growth has been impossible due to fuel prices allocating funds away from non-fuel sectors, what has stood in for growth has been the ‘wealth-effect’ of expanding credit. This last is coming to an end because credit has also become unaffordable. Welcome to the energy crisis in 2014; there are no gas lines or ‘odd-even days’, there is no hated ‘double nickel’. Instead, credit is rationed and countries are left with worthless money that cannot be swapped for fuel; conservation by other means.

It is possible that the model is too conservative, that we have already reached the end of the affordability road. That the effect of high prices is felt at a level that is lower than the trend would indicate. It is also possible the ‘too-high’ price is too low at the same time; so that producers such as Russia and Mexico are unable to meet expenses.

Meanwhile, the managers are not error-free. The new regime of monetary tightening on the part of US and China looks to be a serious misstep, (Ambrose Evans-Pritchard, Telegraph UK):


World risks deflationary shock as BRICS puncture credit bubblesHalf the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc.It is a remarkable state of affairs that the G2 monetary superpowers – the US and China – should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger.“We need to be extremely vigilant,” said the IMF’s Christine Lagarde in Davos. “The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don’t think anyone can dispute that in the eurozone, inflation is way below target.”It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away.

The World Bank warns in its latest report – Capital Flows and Risks in Developing Countries – that the withdrawal of stimulus by the US Federal Reserve could throw a “curve ball” at the international system.


The tightening error is perhaps unavoidable. The energy problem cannot be solved by substitution, by swapping credit for energy; the credit has ballooned to become its own problem. The government strategy of propping key men and hoping for the best turns out to have a limited shelf-life. The personal- and business strategy of relying on public relations in place of facing reality and taking the necessary, albeit painful steps to either adjust or find alternative business models has also failed. While these are not errors per se, they are longer term expedients whose consequences have arrived sooner than their architects intended.

Call this diminished returns on expedients.

While currency problems have to a large degree materialized since the beginning of the year, the forces behind the problems have been building for a long time. All of the countries in trouble today are key men that the corporate- and government establishments have done as much as possible to prop up. Wall Street has lent trillions of dollars overseas since 2008 to purchase GDP growth as if this abstraction is a thing that has some effect on the physical world. It does have an effect and that is to reduce the world further. Funds have become collateral for trillions- more loans in the currencies in question. The problem is that none of the so-called investments turn out to be remunerative, any more so than prior rounds of investments. Managers have been chasing their tails, throwing not-quite good money after terrible.

Non-Remunerative Commerce


It can be said, “In the long run we are all dead”; reality provides its own proofs, we can see that the increase in debt accompanies the so-called advance of progress. Common bookkeeping illustrates the absolute requirement for ‘capital’ (borrowed money) in order to advance industrial works of every kind. The assumption on the part of others is that an industry can turn around ‘at some point’ and begin to pay its own way … which industry cannot do, this is simple thermodynamics.

Rather, the process of borrowing — by itself — is become collateral for further rounds of loans, each round larger than the last. Loans are never ‘paid off’ (finance level loans are impossible to repay even with 10% growth), the growth becomes a form of permission for more loans, not the means of repayment. Eventually the costs of lending become unbearable, which is one of the burdens we are staggering under right now.

Instead there is the rolling default as the worth of funds used to repay become less than the worth of funds lent. The joke is on the borrower because his loan cost the lender nothing yet he must find circulating money and hand it over to his lender. The cost of obtaining circulating money rather than interest is the real burden associated with debt. There is far less circulating money than there are debts, the cost is then simply supply-and-demand rather than the fixed percentage of interest.

Buried within this tangled web of contradictions is the fallacy of currency debasement which will be dealt with elsewhere.

Enter Currency Preference.


Once upon a time, a petrodollar was one held by an overseas oil producer gained from the sale of his product. The petrodollar of the 1970s and 80′s was a problem: what to do with all of them?

The (petro)dollar is now is the preferred medium of exchange for petroleum … along with euros, yen and sterling … as opposed to other, lesser currencies.

The reason is because these media are available in needed amounts, and are freely exchangeable in foreign exchange markets … so far. The lesser currencies, much less so.

Since World War Two, money — including dollars, yen, euros, etc. — has been a proxy for commerce. In this context, commerce is deemed to be worth more than money so there is incentive for ‘customers’ to trade money they hold for goods and services as quickly as possible.

Almost everything the establishment has attempted since the Lehman crisis has been to reinforce this theme of commerce being worth more than money. Now this regime is falling apart.

Meanwhile, under the establishments’ noses, money is becoming a proxy for petroleum. In that context, petroleum is observed as being worth more than commerce; this is because commerce is revealing itself to be unproductive/auto-destructive. The ‘money choice’ is being made starting within the marginal economies around the world: money is less about commerce and more the capital inputs that are precursors for commerce … indeed, tools necessary for survival.

If money as a proxy for commerce, customers rapidly trade it for goods and services. When money becomes a proxy for petroleum, customers hold money because it becomes the last, best chance to gain goods that are certain to be scarce in the future. Here, the dollar becomes a hard currency, much like 1930s dollar, redeemable for gold.

Right not the ‘price’ of dollars and other currencies is set — not by central bankers or by government fiat — but by millions of motorists using dollars in exchange for gasoline in filling stations all over the world 24/7. Here, other, lesser currencies are proxies for dollars; again, some moreso than others.

It’s a very short distance from exchangeability to redeemability. Making that step is what is underway right now. In the early 1930s, the economy of the developed world shifted from a preference for commerce toward one of holding gold. Gold became the last, best chance to get a roof overhead or something to eat. The world’s economy became gold arbitrage and little else; contracts, currencies and credit were deployed as blunt instruments in a deterministic contest to gain gold. In 3 short years business, banking and to some degree agriculture collapsed.

Preference takes place in people’s minds, it effects how they perceive relative worth and what their own conditions allow. In the 1930s, the US and other countries severed the gold-money connection, they ‘went off gold’. Today, we face ‘petroleum arbitrage’ and the use of blunt instruments to gain fuel the same way our hapless ancestors struggled to gain gold. This is what we see in southern Europe, in Middle East and northern Africa and across Central- and South America. It is a pitiless contest, the losers are deprived of imported resources, those with resources are obliged to part with them cheaply.

As then, our challenge is to ‘go off petroleum’, we do so or else. We must grasp the nettle and court an industrial depression in order to avoid the alternative, an endless Greater Depression that is right now unfolding at our feet.

Failed Public Relations Strategy.


A Federal District Court judge recently allowed a defamation suit by climate scientist Michael Mann to proceed against the periodical National Review and a carbon shill Mark Steyn:


Climate scientist’s lawsuit could wipe out conservative National Review magazineDavid FergusonThe National Review magazine, longstanding house news organ of the establishment right, is facing a lawsuit that could shutter the publication permanently. According to The Week, a suit by a climate scientist threatens to bankrupt the already financially shaky publication and its website, the National Review Online (NRO).Scientist Michael Mann is suing the Review over statements made by Canadian right-wing polemicist and occasional radio stand-in for Rush Limbaugh, Mark Steyn. Steyn was writing on the topic of climate change when he accused Mann of falsifying data and perpetuating intellectual fraud through his research.Steyn went on to quote paid anti-climate science operative Rand Simberg — an employee of the right-wing think tank the Competitive Enterprise Institute — who compared Mann to Penn State’s convicted child molester Jerry Sandusky.

Mann, Simberg said, is “the Jerry Sandusky of climate science, except that instead of molesting children, he has molested and tortured data.”

Mann sued for defamation. Steyn and the Review vowed to fight the suit, given that defamation is notoriously difficult to prove in court.

“My advice to poor Michael is to go away and bother someone else,” said Review editor Rich Lowry. “If he doesn’t have the good sense to do that, we look forward to teaching him a thing or two about the law and about how free debate works in a free country.”

As the case has played out, however, Lowry’s hubris has proven to be unwarranted …

Now, as the suit grinds onward, the Review faces fairly dismal prospects. The suit could eventually be dismissed, but that is looking less likely. What’s looking more likely is that Mann could win a substantial judgment in court or the magazine could settle out of court.

The Week doubts that the publication could financially survive either of those outcomes. In 2005, before his death, Buckley estimated that the Review had lost more than $25 million in its 50 years of operation. It has never enjoyed a single moment of robust financial health competing in the “free market of ideas,” but has relied on reader contributions and bailouts from wealthy donors for the entirety of its history.

Conservatives like to point Buckley’s legacy and the Review as the reasonable, moderate edge of an regressive, reactionary party. In its history, the magazine has consistently staked out far-right positions that favor whites over nonwhites and plutocrats over the middle and working classes.


Here is the warmed-over response from the so called business community by way of Bloomberg:


Climate-Change Skeptics Have a Right to Free Speech, TooStephen L. CarterOf course we need defamation law. But our constitutional tradition correctly makes it difficult for public figures to prevail. Close cases should go to the critic, no matter how nasty or uninformed. The preservation of robust dissent allows no other result, and robust dissent is at the heart of what it means to be America.I am old-fashioned enough to believe that the cure for bad speech is good speech. Yes, it’s a cliche. But it’s also a useful reminder. Nobody is forced to enter public debate. Once you’re there, it’s rough and tumble. Unfair attacks are as common as dew and sunshine, and everybody’s reputation takes a beating. That’s the price of freedom.


The central issue has little to do with the likely outcome — the bankruptcy of the worthless National Review.

Rather, there is the panic over the likelihood of carbon emitters and their shills being held to account. Right now, a jury aims to measure shills against their words: the shills don’t like it one bit. If the trial ends in settlement there will be other trials holding shills to account for their lies. If the emitters are lucky there will be trials holding emitters accountable for their actions.

If the emitters aren’t lucky: (finger cutting gesture across throat).

Because there are indeed consequences to carbon emissions and even the most stupid shill knows it.

Pride of Failure and the Fall

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on November 18, 2013


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“It was a miserable damn performance, just like it always is. These people won’t listen. They make the same mistake over and over again in the same way”.

– John Paul Vann after the battle of Ap Bac in South Vietnam, 1963


One of the great themes of the ongoing unraveling is the establishment’s tendency toward failure and the choice taken — usually with great cynicism — to adopt over-elaborate and punitive strategies in the place of simpler, less destructive alternatives. At the same time, this failure strategy is almost always hidden behind a scrim of public theater which by itself indicates the managers understand the choices yet purposefully make the wrong ones.

Administrative failure isn’t new or a monopoly good of the current regime, nor is it entirely the by-product of our current unraveling. Failure is the 600-year-old stepchild of modernity. Along with contrived ‘scarcity’, failures of past regimes are offered as reasons to justify modernity’s expansion into every area of human- and non-human life. Without failures there are no reasons for more ambitious follow-ups. The cans are kicked; the latest- and greatest expedients are duct-taped into place on top of all the others. Complexity isn’t designed, it grows like a fungus; as failures emerge there are more complex responses which reveal more failures which in turn give birth to more complexity.

Permanently eliminating the sources or cause for failure is always judged to be ‘costly’ or ‘difficult’, it ‘takes too long’ or discomforts wealthy clients. Structural adjustments are rejected when the choice endangers some precious aspect of modernity. Because making minor reforms risks the entire enterprise, we hesitate and the status-quo becomes institutionalized.

Failure inhabits military adventures gone awry, policies that pitch the small- but self-sufficient enterprises into competition with gigantic- but credit dependent varieties, decrees which encourage evasions of the law rather than compliance, processes that demand the worst from people other than their best. Failure emerges from money- and credit policies that enrich lenders at the expense of borrowers, support asset prices rather than incomes, that sacrifice the future to the insatiable present. Waiting for us at the end of the road is the entropic failure for which there are no possible antidotes; the light at the end of the tunnel is a grave marker. “Here lies modernity” … when the entire edifice of patched and tattered expedients collapses with a sigh of exhaustion and disillusion.

The ‘Modern America’ the world’s citizens inhabit in 2013 sprang almost fully- formed from the US’s victory over Germany and Japan in World War Two. We defeated two military superpowers in two different parts of the world at once; this was our first- and defining, ‘If we can put a man on the Moon’ moment. Americans were competent; we did things right, we were efficient yet (somewhat) humane and civilized. Our armies triumphed without massacring prisoners or raping and pillaging, they gave candy to the enemy’s children. America succeeded in spite of internal differences and a crushing economic environment. After saving the world from Nazism and Japanese militarism Americans believed they could do anything including remake the debauched old world in their own, atomic-powered, tail-finned image … and to the large degree they succeeded.

America’s failure regime emerged twenty years later in Vietnam; which gave birth to ‘Blunder, American-style’. Vietnam war is the template for our subsequent- and ongoing failures: policy-making as play; denial, the over-commitment to faulty premises and propagandistic marketing, institutionalized stupidity and sadism, fetishized violence and technology, complexity for its own sake; the refusal to consider limits, preening arrogance and intellectual dishonesty; colossal/heedless waste of irreplaceable social capital — Americans’ narcissistic idealism and naive patriotism — all of this for non-existent gains. Ambitious, corrupt men set about to satisfy trivial personal ambitions; even as they failed, the country was broken: red versus blue, old vs. young, hawk versus dove, urban against rural, liberal/conservative. Beavis vs. Butthead … The great failure in Vietnam sits like Carlos Castaneda’s death upon the left shoulder of the United States. Everything the US does and has done since 1968 has been a desperate effort on the part of both the establishment and culture to re-write history; to find a different outcome to the Vietnam War.

Enter the monetary policy failure …

… enter Janet Yellen. It’s not hard to feel sorry for Yellen because she has absolutely no clue what she is about to step into …

Triangle of Doom 110313(1)

Figure 1: The sublime Triangle of Doom: both Bernanke’s and Yellen’s cognitive failure is that they ignore the ongoing exchange relationship between money and petroleum, where both are priced regardless of interest rates. Central banks cannot ‘print’ crude oil, they cannot print jobs or value … they cannot even print money. Central banks can only refinance existing loans, they can witch-doctor and pantomime.

Yellen’s eligibility has less to do with her ordinary talents as an economist, rather more with her ability to meet public expectations of what a Federal Reserve System Chairman is supposed to look, act and sound like. Yellen is a placeholder, a technocratic character set to operate within an elaborate bit of post-modern Kabuki. Her signature characteristic to date has been unswerving support for Bernanke’s monetary accommodations, including zero-percent policy rate and securities purchases and asset swaps with commercial lenders. As Bernanke’s backup samurai, Yellen promises more of the same: more accommodation, lowest of all possible interest rates, more QE (quantitative easing or asset purchases).

That this policy is a self-evident failure does not matter! It will continue until the entire monetary/fiscal regime collapses under its own weight. How long will that take?


Figure 2: The thin, dashed line @ the middle of the chart is the amount of GDP gained by way of the amounts of credit indicated by the red line at the top since 2008; <$1 trillion of GDP gained from the +$35 Trillion in ongoing accommodation/rescue (Doug Short/Lance Roberts, click on for big). Soon enough Inevitably, there will be negative growth gained from accommodation, then what? There is no ‘Plan B’.

Enter the US healthcare flop, (Zero Hedge):


Total Healthcare “Enrollment” As A Result Of Obamacare: -3.9 Million

By Tyler Durden

“We fumbled the rollout on this health-care law,” could be President Obama’s understatement of the century. In the month-or-so since Obamacare was unleashed 106,185 people enrolled (based on a loose re-definition by the White House). However, in that same period, the WSJ reports a stunning 4.02 million people received policy cancellations. So, in a month, a total of 3,918,205 fewer people are now ‘enrolled’ in a heathcare plan than before Obamacare. So far, California, Florida, and Washington are suffering the most under Obamacare…


Figure 3: State net enrollment in the Affordable Care Act including policy cancellations, (ZeroHedge/Wall Street Journal). Failure is built into the strategies the government chooses, so is corruption, (Washington Post):


Health-care Web site’s lead contractor employs executives from troubled IT company

By Jerry Markon and Alice Crites

The lead contractor on the dysfunctional Web site for the Affordable Care Act is filled with executives from a company that mishandled at least 20 other government IT projects, including a flawed effort to automate retirement benefits for millions of federal workers, documents and interviews show.

A year before CGI Group acquired AMS in 2004, AMS settled a lawsuit brought by the head of the Federal Retirement Thrift Investment Board, which had hired the company to upgrade the agency’s computer system. AMS had gone $60 million over budget and virtually all of the computer code it wrote turned out to be useless, according to a report by a U.S. Senate committee.

The thrift board work was only one in a series of troubled projects involving AMS at the federal level and in at least 12 states, according to government audit reports, interviews and press accounts. AMS-built computer systems sent Philadelphia school district paychecks to dead people, shipped military parts to the wrong places for the Defense Logistics Agency and made 380,000 programming errors for the Wisconsin revenue department, forcing counties to repay millions of dollars in incorrectly calculated sales taxes.

Lawrence Stiffler, who was director of automated systems for the thrift board at the time and a 25-year veteran of IT contracting for the federal government, said AMS was highly unreliable. “You couldn’t count on them to deliver anything,” he said.

In the years since the purchase, CGI has grown rapidly in the United States, dramatically expanding its role as a federal and state contractor. Agencies that tapped CGI Federal often rehired the company and, in the past two years alone, the company has been awarded contracts with at least 25 federal agencies worth $2.3 billion.


The failure of the health insurance scheme isn’t simply a matter of poorly executed software. It would have been very simple for the government to expand Medicare to cover every American. Too simple … doing so would have rendered precious insurance companies redundant so it was not even considered. No health insurance approach can succeed without cost controls — patent reform, salaries for medical professionals, the end of piecework payments and malpractice awards, breakup of medical cartels — none of these were considered, either.

Enter home mortgage modification programs, (Town Hall):


The Stunning Failures of Obama’s Mortgage ProgramKevin GlassWay back in 2009, President Obama’s Treasury Department launched the Home Affordable Modification Program, a massive authorization to help homeowners struggling with their mortgages in the wake of the financial crisis. 1.2 milllion people participated in the program at a cost to taxpayers of $4.4 billion.A report [pdf] dropped this week from the Office of the Special Inspector General for TARP (SIGTARP) that HAMP has a stunning failure rate. Of the 1.2 million HAMP participants, 306,000 have re-defaulted on their mortgages, at an additional cost to taxpayers of $815 million. What’s more, another 88,000 homeowners in the HAMP program have missed payments and are at risk to re-default.

The mortgage modification schemes share many of the characteristics of the health care enterprise: complexity for its own sake, denial regarding the extent of the problem and capture by the same industries that caused the original breakdown in the first place. HARP is another failed home mortgage modification program, (Examiner);


HARP loan program has been a dismal failure

Shelby Bateson

December 13, 2009

The HARP loan refinance program, which was supposed to have aided four to five million home owners with a streamlined refinance of their existing mortgage has been a dismal failure.

The HARP (Home Affordable Refinance Program) program was designed to help those with loans owned by either Fannie Mae or Freddie Mac, but underwater, refinance their mortgages to lower prevailing mortgage rates. The program was rolled out in April 2009 with lots of anticipation that this program would free up cash for those home owners and help the economic recovery.

The end result is that only 116,677 loans, as of September 30, 2009, have been modified. The problem has not been a lack of interest by home owners, but a lack of interest by lenders. As originally rolled out, lenders were able to refinance loans up to 105% underwater on the first mortgage, regardless of the amount of a second mortgage.

As home values continued to fall, during the summer, the ratio underwater was raised to 125%, but almost no lenders permitted the increased ratio. And, in fact, lenders found almost any reason under the sun to decline these loans.

Enter foreign development failures, (World Affairs Journal):


Money Pit: The Monstrous Failure of US Aid to Afghanistan

Joel Brinkley

More than half of Afghanistan’s population is under twenty-five, which shouldn’t be surprising since the average life span there is forty-nine. But the United States Agency for International Development looked at this group and decided it needed help because, it said, these young people are “disenfranchised, unskilled, uneducated, neglected—and most susceptible to joining the insurgency.” So the agency chartered a three-year, $50 million program intended to train members of this generation to become productive members of Afghan society. Two years into it, the agency’s inspector general had a look at the work thus far and found “little evidence that the project has made progress toward” its goals.

The full report offered a darker picture than this euphemistic summary, documenting a near-total failure. It also showed that USAID had handed the project over to a contractor and then paid little attention. Unfortunately, the same can be said for almost every foreign-aid project undertaken in Afghanistan since the war began eleven years ago.


Deja vu all over again … (Washington Post):


Top Democrat: Obama’s red line strategy on Syria ‘not well thought out’,

By Aaron Blake

The top Democrat on the House Armed Services Committee says President Obama’s decision to draw a “red line” when it came to Syria using chemical weapons “was not well thought out.”

“I don’t think you draw a red line like that, that is not well thought out,” (Representative Adam) Smith said during an appearance at the Council on Foreign Relations on Thursday. “You do not say, ‘If you step across this line, we will commit U.S. military force,’ unless you really mean it, unless you know the full implications of it.”

Smith also accused the administration of not working with Congress on foreign policy and of making it look like it was developing that policy “on the fly.”


There is the failure to craft responsible energy policy and climate policies … instead there is denial, (Bloomberg):


U.S. to Be Top Oil Producer by 2015 on Shale, IEA Says

By Grant Smith

The U.S. will surpass Russia as the world’s top oil producer by 2015, and be close to energy self-sufficiency in the next two decades, amid booming output from shale formations, the International Energy Agency said.

Crude prices will advance to $128 a barrel by 2035 with a 16 percent increase in consumption, supporting the development of so-called tight oil in the U.S. and a tripling in output from Brazil, the IEA said today in its annual World Energy Outlook. The role of the Organization of Petroleum Exporting Countries will recover in the middle of the next decade as other nations struggle to repeat North America’s success with exploiting shale deposits, the agency predicted …

U.S. crude production rose to 7.896 million barrels a day in the week ended Oct. 18, the most since March 1989, according to the Energy Information Administration. West Texas Intermediate futures dropped as much as 83 cents to $94.31 a barrel in trading today on the New York Mercantile Exchange and was $94.83 as of 11:36 a.m. in London.

Global oil demand will expand by 14 million barrels to average 101 million a day in 2035, according to the IEA report. The share of conventional crude will drop to 65 million barrels by the end of the period because of growth in unconventional supplies, the IEA said without providing current data …

Brazil will triple output to 6 million barrels a day by 2035 as it exploits deep-water reserves, an expansion that will account for one-third of the increase in global production and make the nation the world’s sixth-largest oil producer, according to the agency.


How goes Brazil, really?

Screen Shot 2013-11-12 at 10.08.35 AM

Figure 4: Brazilian net exports by way of BP/Mazama Science Who knows what will occur twenty years from now when the promoters have retired and cannot be held accountable for their misstatements? Right now Brazilian demand is rapidly outstripping diminishing Brazilian supply. Putting cars on the highway — in Brazil as elsewhere — costs a lot less than extracting oil from oil reservoirs under thousands of feet of ocean water, (FT).


From burgeoning start-ups to Brazil’s own state-controlled behemoth Petrobras, many of the industry’s players are struggling to live up to the heady expectations of five years ago when vast offshore oil discoveries promised to transform the country.

Brazil’s 2007 pre-salt finds, estimated to contain up to 100bn barrels of oil, came as oil prices soared towards $150 a barrel and capital began to pour into emerging markets, creating a sense of euphoria in the industry that has gradually turned to disappointment.

“There was the idea that Brazil would solve all its problems with the pre-salt oil and this optimism contaminated the market, creating a large speculative bubble,” says Adriano Pires, founder of the Brazilian Centre of Infrastructure and a former member of the country’s oil regulator ANP.


The International Energy Agency says Brazil will more than double its production while the Brazilians themselves are unable to hold the modest level of production they already have; Brazil looks to have entered terminal decline, its oil fields have ‘vast’ potential but apparently little accessible oil …


Both climate change and energy depletion are serious as a heart attack. Meanwhile, Americans are unwilling to even consider make the needed material sacrifices so that the human race might escape the consequences of dumping billions of tons of carbon- and other gases into the atmosphere. As in Vietnam, we refuse to face reality, we believe our machines will save us rather than destroy us contrary to all available evidence.


Surviving Climate Change Is a Green Energy Revolution on the Global Agenda? By Michael T. KlareA week after the most powerful “super typhoon” ever recorded pummeled the Philippines, killing thousands in a single province, and three weeks after the northern Chinese city of Harbin suffered a devastating “airpocalypse,” suffocating the city with coal-plant pollution, government leaders beware!  Although individual events like these cannot be attributed with absolute certainty to increased fossil fuel use and climate change, they are the type of disasters that, scientists tell us, will become a pervasive part of life on a planet being transformed by the massive consumption of carbon-based fuels.  If, as is now the case, governments across the planet back an extension of the carbon age and ever increasing reliance on “unconventional” fossil fuels like tar sands and shale gas, we should all expect trouble.  In fact, we should expect mass upheavals leading to a green energy revolution.

What is a ‘green energy revolution’? It sounds like all the other energy revolutions, more waste and another opportunity for people to fool themselves …

ADDENDUM: The lesson of Vietnam

Americans in Vietnam believed that it was impossible for the US military to be beaten by poorly equipped Vietnamese farmers and tradesmen. Yet, they were beaten, and the reason was the tremendous advantages that the Americans had over their Vietnamese adversaries — of money, economic power, intelligence gathering, transport, technology and weapons. In Vietnam and elsewhere, the greater the advantages = greater certainty of defeat.

Advantages were the American’s undoing because they relied on them to the exclusion of everything else and became over-confident. The Vietnamese communists cleverly planted false information regarding communist infiltrators inside neutral- and pro-South villages and towns, this was picked up by US military intelligence networks which led to the Americans launching artillery and air strikes to harass the infiltrators. These attacks caused the deaths of many civilians who quickly turned against the Americans. Over a three-year period beginning in 1963, most of South Vietnam changed from being pro-South Vietnam and pro-American to pro-communist due to compromised intelligence and indiscriminate American bombing and shelling. Once the marginal citizen in South Vietnam become an adherent of the communist North, the war was effectively lost for the Americans. Past that point, it didn’t matter how many Vietnamese the Americans killed, more deaths simply tilted the balance against the Americans and their Vietnamese adjuncts. Toward the end, the frustrated Americans were reduced to waging a genocidal air campaign against their putative allies.

The same manner, our technological advantages are the root cause of our ongoing economic, social and political failures. Use of technology incurs costs which add up, eventually costs become greater than any possible benefit that can be gained by the technology. In the beginning the costs are so modest to be invisible, they aggregate over time, like the rate of depletion in oil fields or amounts due as interest. Eventually, the costs become breaking, like our debts, taken on to pay for and operate our precious — and money losing — machines.

The Chinese philosopher Sun Tzu remarked, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

In Vietnam the Americans had false ideas about themselves and contempt for the Vietnamese citizens whom they were intended to support; Americans also had purposeful ignorance about the enemy. The Americans did not know themselves or their enemy; as a result they succumbed despite a vast expenditure of treasure, materials and millions of lives.

We don’t bother to know ourselves right now, we prefer to live within bubbles of distraction that emerge from the television and from in front of the windshield of a car. We have made the world and all it contains into our enemy at the same time! We can’t bother ourselves to know anything about the world, we have contempt for it. This leaves us with a choice that is rapidly becoming barren: we can stop fighting, lay down our advantages and become peaceable. We will be uncomfortable but we need not “fear the result of a hundred battles” as Sun Tzu would say … because we would not fight any. Alternatively … we can be crushed, just as we were in Vietnam instead by the world we have taken up arms against.

Nothing Lasts Forever

Off the keyboard of Steve from Virginia

Follow us on Twitter @doomstead666
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Published on Economic Undertow on November 4, 2013


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Triangle of Doom 110313(1)

Figure 1: the Triangle of Doom® Brent crude futures by Where we are within the triangle is a bit like Alice half-way down the rabbit hole. What is at the other end?

Americans don’t want to know as their precious cars slowly slip away … along with the suburbs, the jet vacations to Las Vegas and Orlando, the college educations for the children, the ‘money-for-nothing’ investments, the privilege and the absence of accountability. Right now the car and the cost of fuel is pricing everything else out of reach … and the Americans are too dumb and TV-addled to recognize it.

Drillers are able to borrow from finance for modest periods of time. They have done a very good job promoting their latest speculative efforts and have been able to find hundreds of billions of dollars in new financing for plays that are marginal compared to previous plays. After the drillers borrow the customers arrive to retire the drillers’ loans with their own … either that or the drillers go out of business.

Because the new plays are more complex and difficult to exploit, the amounts needed by the drillers steadily increase. Fifty years ago a dollar would return fifty dollars or more worth of new crude, presently a dollar returns ten dollars or less. This diminution of returns is the consequence of our society’s extraction- and consumption success. No greater drilling effort … or monetary ‘cheating’ … can retrieve lost productivity. Waste has a lower entry cost than drilling; what we do best is waste more, faster.

Customers ultimately meet the cost of petroleum, they must borrow to do so. Meanwhile, what is borrowed for is simply thrown away. Oil in the ground is perpetual but its use is one-time and instantaneous. Because fuel has historically been improperly priced as a ‘loss-leader’ for the rest of industry there is no incentive to find other uses but to burn it for pleasure and label the process ‘work’. This lie has become very costly over the long term,

Continued borrowing in ever-increasing amounts of fuel slowly pauperizes the oil consuming customers who are ruined by their goods’ absence of return. Besides fuel, customers must borrow to pay for cars, freeways, parking lots, insurance companies and militaries. Think of energy components as accounting entities: the cost of fuel- plus the cost of credit needed to gain the fuel are on the ‘expense’ side of the ledger, the returns from using the fuel, the cars, freeways and whatnot are entered on the ‘income’ side, these two entities added together must equal zero. However, fuel use offers minimal returns; driving the car cannot pay for the car or anything else. Balancing the national energy ledger requires borrowing; eventually the account becomes nothing but a mass of bad loans.

This is how the world has accumulated so much debt, not social programs for humans but credit subsidies for the auto- and auto related industries and the absence of return for these things’ users. Right now, the arguments about continuing social programs are about choosing what to jettison in order to keep driving cars and wasting fuel. This is a foolish choice because the onrushing costs of subsidizing the car industry and fuel supply are unsustainable. Regardless of what choice is made the end result is insolvency and deleveraging … and fuel shortages.

A too-high price for fuel causes distress within the credit system: consider the too-high price to be the ‘upper bound’ where enough damage is done to the economy to destroy fuel demand. Since 2008 there has been an observable series of stepwise declining high fuel prices along with repeated crises; each succeeding price lower than those preceding, each crisis being more damaging. The world is becoming poorer every day … made so by the marching real costs of credit and petroleum.

The demand destruction process is incremental and cumulative: over time more customers become insolvent and can no longer borrow. As a consequence, governments have become the world’s borrowers of last resort. They are the ‘last man standing’ able to indirectly subsidize the petroleum industry. Governments and their central banks have become the rear guard of the waste-making status quo even as their own credit costs mount.

The next step down the rabbit hole is for governments themselves to become insolvent … and for the fuel-waste regime to simply fall apart, as it must. This will occur even as the extraction industry by itself appears to be robust … due to its own self-aggrandizing propaganda and wishful thinking on the part of consumers.

Here’s a note by Jeffrey Brown on rising costs, (Peak Oil Barrel/Ron Patterson):

Recent Global Annual Crude Oil Prices Versus Global Net Exports of Oil and Rising US Crude Oil Production.We have of course seen a cyclical pattern of higher annual highs and higher annual lows in global (Brent) crude oil prices in recent years, but I think that the rates of change between successive annual price lows, or troughs following annual oil price peaks, is very interesting.Peak to Trough Annual Brent Crude Oil Prices, 1997 to 2013

    • 1997: $19
    • 1998: $13
    • 2000: $29
    • 2001: $24 (1998 to 2001 rate of change: +20%/year)
    • 2008: $97
    • 2009: $62 (2001 to 2009 rate of change: +12%/year)


The 11 year 1998 to 2009 overall of change in trough prices was 14%/year.

    • And then we have 2012 to 2013.
    • 2012: $112
    • 2013: $108 (Est. price)


Based on estimated price for 2013, the four year 2009 to 2013 rate of change in the trough price would be 14%/year ($62 to $108).

The long term 15 year 1998 to 2013 rate of change in trough prices would also be 14%/year ($13 to $108).

While currently rising US crude oil production has certainly contributed to keeping annual Brent crude oil prices on a plateau of about $110 for three years, something that is not widely understood is that the annual volume of oil lost to declining production from existing wells is almost certainly increasing at a rapid clip.

Assuming an average production rate of 7.5 mbpd (million barrels per day) for 2013 and assuming a 10%/year decline rate from existing oil production, we would need to replace the productive equivalent of 100% of current US crude oil production over a 10 year period, everything from the Gulf of Mexico to Alaska, in order to maintain 7.5 mbpd.

If we assume that the the decline rate from existing US oil wells increases from about 10%/year in 2013 to 20%/year in 2023 (a more likely scenario in my opinion), we would need about 12 mbpd of new production in 10 years, in order to maintain 7.5 mbpd for 10 years. Under this scenario, the annual volume of oil production lost due to declining production would increase from 0.75 mbpd in 2013 to 1.5 mbpd in 2023.


Even if the US can come up with the needed credit, it is hard to see where the needed oil will come from.

Figure 2: decline rates vs. number of wells and extraction rate of new well @ Bakken from EIA, (from Matt Mushalik/CrudeOilPeak). As tight wells age, the rate of depletion increases. More wells must be drilled to keep pace with depletion along with even more to increase ‘production’.

It is not simply age that causes wells to deplete but our restless urge to waste capital for fun, driven by a false understanding that if we do not waste, then someone else will waste in our place.

A proverb in the futures’ markets is, “the solution to $10 corn is $10 corn …” The high priced corn is an incentive for farmers to bring more to the market which would drive prices lower. The energy analog is, “The solution to waste is waste …” Given accelerated rates of waste the outcome is resource capital exhaustion, bankruptcy and the inability to waste at all … not the best way to run a business.

Left to Our Own Devices

Off the keyboard of Steve from Virginia

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Published on Economic Undertow on September 2, 2013

Discuss this article at the Epicurean Delights Smorgasbord inside the Diner

Triangle of Doom 090113

Figure 1: The Triangle of Doom, closing in on countries near you! The frenzy over a possible US-led attack on Syria resulting in a wider war has pushed Brent bidding to $119 per barrel the same way the possibility of a US- Israeli attack on Iran drove prices to $128 in 2012. A price much over $120 per barrel for more than the shortest period would cause a gigantic economic spasm the same way $147 per barrel undid the world in 2008.

For this reason, there is diminishing likelihood of a US or NATO attack on Syria, only saber-rattling to keep the crude price from plunging below cost of production. The consuming world cannot afford to attack Syria, it cannot afford the risk of a wider conflict, it cannot afford for the Saudis and Iranians to launch missiles at each others’ tankers, pipelines, fuel terminals and desalinization plants. As with everything else in this not-quite-so-green Earth, there are diminished returns to war.

At the same time, the world cannot afford sub-$100 crude as the real cost of production creeps relentlessly higher. Easily accessed light crudes are being exhausted leaving only hard to find, poorer quality replacements: when the price declines, there are no waiting reserves of low-cost fuels to be put back into service, only shortages.

Since 2008, the highest tolerable price has declined steadily as the system of interlocking banks and debt-money unravels. Credit diminishes and countries struggle to import both goods and crude oil … as is the case now in Europe and in South Asia. The process is self-reinforcing: when a country cannot borrow it is unable to retire maturing debts and is insolvent … because a country is insolvent it cannot borrow.

The establishment strategy has been to force lending and inflate serial bubbles. There are zero percent interest rate policies (ZIRP) by the Federal Reserve and other central banks, the non-stop moral hazard and carry trades. Cheap dollar credit is shipped overseas to become collateral for loans offered in local currencies at a higher rates of interest. The idea is for the borrowing country to hold both the dollars-as-collateral plus the newly issued local currency. This effectively multiplies the countries’ money supply.

Dollar collateral is not currency rather it is loans. Funds are borrowed from the money markets, commercial paper and repo. These loans require constant roll-over, that is new loans obtained to retire amounts due on maturing loans. When roll-over cannot be had or is expensive — or when Americans import fewer manufactured goods — the flow of dollar credit overseas shrinks rapidly, the collateral vanishes. Ditto, when the collateral must be re-exported then swapped for petroleum. Dollar-borrowing countries are obliged stump up more collateral to maintain stable exchange rates — a kind of dollar margin call. As always, the fewer the dollars available, the greater the demand for them, (Ambrose Evans-Pritchard):


India pushes ‘shock and awe’ currency plan to save BRICS“It is going to happen in a matter of days rather than weeks, Brazil and India can start the move,” said Dipak Dasgupta, a top Indian official.

Mr. Dasgputa told Reuters that China, Brazil, India, Turkey, Russia and South Africa have all been squeezed as the US Federal Reserve prepares to tighten monetary policy. Joint action would give emerging markets greater firepower, allowing them to deploy their combined $8.7 trillion (£5.6 trillion) of reserves and crush “speculators”, rather than being picked off one by one.

However, it is unclear whether such action would serve any useful purpose if the real problem is exhaustion of catch-up growth models in these countries, and boom-bust credit cycles. “This could backfire,” said Ian Stannard, of Morgan Stanley. “If they did this, they would have to sell US and European bonds and that would push up yields. It was rising yields that started this process in the first place.”

The side-effect of such intervention would be monetary tightening, pushing countries into deeper trouble. India’s growth fell to 4.4pc in the second quarter, the lowest since the post-Lehman crisis in 2009. This is eroding tax revenues and pushing the budget deficit back over 5pc of GDP, with a ratings downgrade looming.

“We are no doubt faced with important challenges,” said Indian premier Manmohan Singh. The rupee is in freefall, crashing 25pc over the past four months to a record low of 68.84 against the dollar.


All of these are of a piece with the strategy followed in Europe after the euro appeared in 2000. Rates were repressed to favor Germany which resulted in the Mediterranean PIIGS countries being flooded with cheap euro-denominated credit. The outcome is everywhere identical: ‘leveraging up’, asset price inflation, speculation and pyramid schemes that are all dependent upon perpetual ‘hot money’ flows. This is what passes for industrial ‘economy’ when ‘catch up growth’ is exhausted, everyone is surprised when it fails.

Credit expansion adds to petroleum demand while supply remains more-or-less unchanged … as it has since 2005. The PIIGS used cheap credit to buy German cars, consumers in India, China, South Asia and elsewhere have done the same thing. The absence of return from buying and using cars while borrowing to do so has stranded consumers and their countries, leaving them at the edge of the insolvency abyss.

‘Development’ becomes toxic as demand balloons: cars, airplanes, highways, retail malls, office buildings are easier and cheaper to build and deploy than new oil fields are to find then exploit. The increase in car sales is considered to be ‘positive’ but costs multiply, emerging as interest rate increases. Hot money flows — whether euros or dollars — are reduced or reversed, the outcome is inevitable deleveraging and asset price deflation. In Europe, Irish and Spanish real estate were deflated along with state debt instruments. In the developing ‘tigers’ the vulnerable assets are the local currencies.

Fuel is a speculative asset, it can be bid up by cheap credit. Unlike stock- or real estate prices, the high fuel price has a real-world consequence; it forces a user-choice between speculation and gas for the precious cars. Something has to give and that is the carry; when it fails, so does support for inflated asset prices as well as fuel. Brazil, India and Indonesia are the ‘new’ Spain, Greece and Portugal … all are victims of failed carry.

As currencies depreciate, imports become more costly including fuel which must be paid for with increasingly scarce dollars. The outcome is for countries to set aside dollar reserves to pay for fuel. As the fuel is wasted so are the dollars which are eventually exhausted.

Taking place under everyone’s noses is ‘conservation by other means’. Dollars and other hard currencies become the proxy for fuel rather than proxy for fuel waste, they are hoarded as a consequence. Depreciation of local currencies such as the rupee drains citizens’ purchasing power; the outcome is permanent exclusion of vulnerable users from the fuel marketplace. Overseas fuel consumption is exportable: fuel not burned up for nothing in New Delhi, Tokyo or Madrid can be burned up for nothing in Northern Virginia. It is not America seemingly against the world so much as it is America’s car dealers … against the rest of the world.

Besides diminished worth of money, purchasing power is diminished by way of defunct banks, insolvent governments and dysfunctional central banks. The worst case scenario is that everything fails at once with both money and institutions useless and discredited … leaving the citizens to their own devices or with no devices at all.

In India, there is inflation in rupees and deflation in dollars; in Brazil there is inflation in reals, deflation in dollars; in Indonesia, there is inflation in rupiah, deflation in dollars. Despite all the talk of US ‘money printing’ there are few if any dollars to be had. Dollar credit is not the same as dollar currency. It is the ephemeral nature of credit overseas that is at the heart of the currency mess, not dollar persistence.

The Real Versus Fake …

While currency depreciation needs to be understood, scale and finance mechanics — as well as propaganda — obscure the larger perspective. There are the threats of war, there are actual wars underway. In the Middle East there is the titanic struggle between petro-superpowers Saudi Arabia and Iran for regional hegemony including control over Iraqi and eastern Mediterranean hydrocarbon reserves. Sunni Saudia versus Shiite Iran: right now the conflict is being fought with- and between proxies including the United States.

The consumer superpowers US and China have taken sides: the US supports Israel, Saudia, Qatar and their al Qaeda surrogates while the Chinese support Iran, Hamas and Hezbollah. The ‘wild-cards’ are Turkey and Russia, both with ambitions in the eastern Mediterranean as well as the erupting masses in Egypt. The contest is presumed to be over energy but in reality is about rationing demand; it is over cars, to determine who will be able to own and drive one … and who won’t.

The ‘alliance of fuel necessity’ between the US and Saudia is the ‘secret’ reason behind both the Iraq invasion in 2003 and further US military adventures in Egypt, Africa, Yemen, Afghanistan and elsewhere. Saudia is an absolutist regime, a paranoid ‘Nazi-lite’ state that — along with absolutist Israel — has a throttle on US policy by way of the gasoline hose. Saudia is the marginal crude producer to the United States as is Iran for the Chinese. Any hesitation on the part of the consumers’ invites critical scrutiny from the various Saudi- and Iranian autocrats.

… after all, US fuel consumption is exportable, any fuel not wasted in California is available to waste in Beijing … and vice versa.

The Sunni-Shia struggle will likely carry on a few more years — or more centuries with sticks and stones. It will be driven as it has been by ambition, false doctrines and religious prejudice … until the adversaries are bankrupted by their own stupidity as well as that of their dependents. Simple energy conservation on the part of the consumer states would tamp down the conflict; it would preserve in the ground reserves of scarce readily-accessible fuels while liberating fuel dependents from usurious lenders, Conservation would financially constrain the suppliers and render them more peaceable. This alternative is too sensible: the exporters are desperate to exchange their irreplaceable capital for false promises lifted from comic books … to do so in order to ‘win’ an apocalyptic conflict that has lasted over a millennium. At the end of the day there is nothing but the (hard-won) empty bag and universal ruin.

Outside of the Saudi goad … the obligation of the American servant to his master … there is no point to a US missile- or airstrikes against Syria. There is nothing to gain. At best a strike would bounce the rubble, at worst the Syrians would sink an American ship which would severely damage the prestige-and presumed ‘invincibility’ of the military. A strike at the whim of the president without a coalition or support from Congress would be a manifestation of his personal insecurities and weakness of character; like a Macbeth or a murderous barbarian king who orders random subjects be put to death so as to demonstrate to himself and to others that he is indeed king.

Our greatest problem is that we refuse to discuss our problem. We eliminate perspective by scrutinizing the world instant-by-instant, what occupies us is the all-encompassing present. We dare not look deeply into the future or even speak its name … there is the possibility of offending it. Looking forward ten years or even less is too frightening: within the scope of our willful blindness the future sets up shop right under our noses, a trap we cannot avoid:

Mumbai slum 1

Unknown photographer, the slum as the apotheosis of industrial modernity, comparative advantage at work, (Lebbeus Woods). What grows within the modern, industrial economy is costs. Trade between nations includes export of poverty from the developed world to the rest; poverty is an ‘opportunity cost’, best borne by ‘others’ such as those in this stupendous slum outside of Mumbai.

The larger conflict is between people and their toys; humans versus cars. We absolutely refuse to look at the world this way. We love our toys and give them human attributes, artificial virtues that they cannot as machines possibly possess. The toys silently ask, “How much do you love us?” They demand that we prove it. The costs are metastasizing; eventually the entire world becomes a gigantic slum visited with savage conflicts and unimaginable disasters … with the inhabitants having no idea why …

Even if the human species could adapt itself to endure such an outcome, who would choose to do so? For how long? To what end?

Since 2008 there has been crisis; deleveraging, bank bailouts, bankruptcies, food shortages, currency collapses and hyper-inflation, mass unemployment, negative growth, spreading wars, insurrections, piracy and failed governments … the slum-ification of the world. We pretend that all of these events are nothing more than disconnected episodes; a run of ‘bad luck’ that will soon pass. We expect recovery, our economists and policy makers insist upon it, they pray for it in quiet moments when they believe nobody is watching. ‘Recovery’ is what progress offers to us as our evolutionary prerogative along with endless growth.

Sadly for us, our onrushing events represent a change in conditions, not episodes. All of them are the aggregated costs of industrialization. Pushed into the distant future by way of finance credit and fossil-energy availability starting in the 18th century … the future has arrived … with more (abysmal) futures certain to come. We enter a world of ‘less’. Less does nothing, it simply is: we’re not used to less. Nevertheless, we either deal with it somehow or it deals with us.

In place of the recognition that we must adapt and do so quickly we borrow from Hollywood and television producers pleasing fairy tales offering ‘more’. If one fantasy does not satisfy us we try another. In the mega-slum we confront our inescapable destiny: what John Michael Greer calls the ‘salvage society’ far beyond what he can imagine … here and now … coming to countries near you.

Knarf plays the Doomer Blues

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Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money

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Merry Doomy Christmas

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Peak Customers: The Final Liquidation Sale

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Collapse Fiction

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